Unforeseeable changes in the legal environment are a source of legal uncertainty, which theory suggests is negative for firms’ investment decisions. Yet, empirical evidence is limited. One reason is the difficulty of producing comparable measures across time and regions. This paper develops a new index of legal uncertainty, by extracting the information content in all laws approved in a country and year to calculate the unforecastable component in legal content, for a panel of 44 countries. I present how the index is constructed, test its robustness and compare it with available measures of institutional quality. I show great variability in legal uncertainty across countries and institutional frameworks. I then apply the index to provide evidence on the consequences of legal uncertainty for investment and employment. Results show that, in the event of an increase in legal uncertainty, firms react by slowing down investments and laying off workers.
LocationEdificio Central Aula 30
SpeakerMaximiliano Sosa (Uppsala)
"Legal uncertainty and its consequences: A natural language processing approach".