The model also suggests that changes in judicial efficiency may
affect γi. To see this, recall that we interpret the terms (1−θ)QHT
and (1−φ)Ai as the amount of resources lost in the case of a legal dispute,
and that an increase in θ or φ signals a more efficient judicial
system.11 These two parameters affect γi in two ways: (i) by reducing
credit rationing, and (ii) by changing the relative return between HT
and LT projects. The first channel operates because a better judicial
system (an increase in θ or φ) reduces the threshold Amin (see
Eq. (5)) and the region of credit rationing. Disclosed assets increase
accordingly, and the underground economy shrinks. An increase in
φ also raises the return on HT relative to LT projects. This increases
also the incentive to disclose assets and to invest in the HT technology