Judges, Out-Of-Court Rewards, and In-Court Behavior: Evidence From an Italian Legal Reform

Abstract

We empirically assess how out-of-court monetary rewards influence related in-court judicial behavior. In Italy, before a legal reform, Council of State judges were chosen by big law firms to serve as arbitrators in out-of-court arbitrations involving big law firm clients. Drawing on case-level data on Council decisions and using a difference-in-differences approach, we establish three central findings. First, before the legal reform, and consistent with the argument that judges strove to compensate big law firms for afforded out-of-court earning opportunities, big law firms were more likely to win Council cases when those cases were presided over by judges with prior arbitration experience. Second, as a result of a 2010 announcement of an anticorruption law reform that banned judicial participation in arbitrations, big law firms’ winning prospects in Council cases presided by judges with prior arbitration experience decreased by 33.4 percentage points. Third, following the law’s enactment, the success rate of big law firms in these cases converged to the success rate of big law firms in analogous court cases presided by judges without prior arbitration experience. Our analysis provides evidence of the importance of extrinsic motives for judicial behavior.