Congestion in the Justice System and Private Investments

Abstract

Purpose: Public goods and services play a vital role in a given economy. Most importantly, optimal supply of public goods and services is desirable. The justice system services are public services that, as argued by most economists and governments, would be expected to spur the growth of private investment. However, these services are prone to congestion which may influence their supply and level of use. This study investigated the effect of congestion in the justice system on private investments growth in Kenya. Methodology: Drawing from the modified neoclassical theory of investment, a government service characterized by congestion was integrated as an input in the firm’s production function to derive a structural model for private investment growth. Utilizing data for the period 1960 to 2016, two-stage least square (2SLS) instrumental variable (IV) method was used for estimation. Results: The study found that congestion in the justice system reduces growth of private investment. This implies that congestion increases firm’s adjustment costs, decrease their profitability and consequently reduces capital accumulation. Recommendation: To enhance the growth of private investments, we recommend reduction of congestion in the justice system to the possible minimum. This can be achieved by upscaling resolution of disputes out of court to reduce inflow of new caseload. Consequently, the waiting period between hearings and mentions for existing cases would reduce translating to speedy conclusion of cases. The justice system institutions with involvement of litigants and their legal representatives should continuously undertake activities targeting rapid finalization of old cases, but not at the expense of inbound demand for justice. Consequently, congestion would diminish creating a legal and contracting environment characterized by minimal delay hence supporting accumulation of capital.