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Trust and Law in Credit Markets

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  • Koji Asano

Abstract

This study examines the coevolution of trust and legal institutions in a model of competitive credit markets plagued by asymmetric information. When entrepreneurs’ relative payoff to productive activities versus cheating is private information, dishonest ones, who intend to cheat, can enter credit markets and be cross‐subsidized by honest ones, who engage in productive activities. To exploit this benefit, dishonest entrepreneurs demand weak legal enforcement through the political process. This rent‐seeking behaviour interacts with the formation of trust, generating an underdevelopment trap with weak enforcement and distrust. Technological advancement may encourage entrepreneurs’ rent‐seeking and aggravate distrust.

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  • Koji Asano, 2022. "Trust and Law in Credit Markets," Economica, London School of Economics and Political Science, vol. 89(354), pages 332-361, April.
    • Handle: RePEc:bla:econom:v:89:y:2022:i:354:p:332-361
    DOI: 10.1111/ecca.12400
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