The Economic Costs of Ambiguous Laws

Abstract

Poorly drafted laws are ambiguous, create legal uncertainty, and hinder economic activity. By processing the full corpus of Italian legislation, we show that legal uncertainty—measured by the probability that lower courts and the Supreme Court of Cassation disagree—is higher in cases involving poorly drafted laws and varies systematically across courts. To quantify the economic costs of this legal uncertainty, we exploit a court consolidation reform that exogenously reassigned firms to courts. Firms facing greater legal uncertainty invest less and experience slower growth. Italy’s GDP would be about 5% higher if laws were drafted as clearly as the Constitution (at the top-quartile threshold of the drafting quality distribution).