Disputes over penalties for breach of contract are often solved in court. We provide a simple model showing how inefficient courts may cause buyers to refrain from enforcing penalties for late delivery to avoid litigation, inducing sellers to delay. Using a large dataset on Italian public procurement, we then study empirically the effects of court inefficiency on public work delays. We find that, where courts are inefficient: i) public works are delivered with longer delays; ii) delays increase for more valuable contracts; iii) contracts are more often awarded to larger suppliers; iv) a higher share of the payment is postponed after delivery.
- court efficiency,
- enforcement cost,
- public procurement contracts,
- time incentives.