By Marco Pagano
How a lot safety may still a country's judicial procedure find the money for collectors? the reply has far-reaching implications for the functioning of credits markets, quite in constructing areas similar to Latin the USA, the place creditor rights are asymmetric and enforcement frequently lax. Defusing Default makes use of a number of views and instruments, together with theoretical modeling and cross-country proof, to check the prices and advantages of shielding creditor rights. Case stories examine creditor security in Argentina, Brazil, Chile, Costa Rica, Paraguay and Peru. The stories locate that greater judicial enforcement could support to make extra credits on hand and increase the general functionality of the credits marketplace. one other discovering is that personal contracting in credits markets, together with information-sharing preparations, may also help catch up on criminal deficiencies and create incentives to restrict default in international locations the place judicial enforcement is expensive or useless. eventually, the publication explores the political economic system of debt moratoria by means of interpreting bailouts and financial ruin.
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Extra info for Defusing Default: Incentives and Institutions
For this reason multicollinearity alone cannot explain the loss of significance of the creditor rights variable. Another specification attempted to check whether a stricter protection of creditor rights has differential effects in countries with disparate law-and-order traditions by interacting creditor rights and the rule of law. 6 for different subsamples. The first column reports the results for the subsample of OECD countries. Whereas the macroeconomic controls (inflation and budget surplus) are both significant and have the theoretically expected signs, the effects of the legal variables (rule of law and creditor rights) are not statistically significant.
How does a lender ascertain the borrower's level of risk? Suppose that the loan contract can specify only an interest rate—that is, the lender cannot impose collateral requirements. Due to the lender's inability to discriminate between honest and dishonest entrepreneurs, the equilibrium interest rate will have to be high enough to compensate for the risk of lending to a crook. But while a crook is willing to borrow at any interest rate, an honest entrepreneur's demand for credit decreases as the loan's interest rate rises.
Bester (1985), Besanko and Thakor (1987a, 1987b) and Chan and Thakor (1987) show that such information can improve the allocation of credit in equilibrium, tempering the problems created by adverse selection. Lenders can discriminate among borrowers by offering a menu of contracts, each specifying a different interest repayment and collateral requirement. A contract with a large collateral requirement will carry a lower interest rate than a contract with a relatively small (or no) collateral requirement.
Defusing Default: Incentives and Institutions by Marco Pagano