Should Courts Enforce Credit Contracts Strictly?
AbstractThe intimate linkages between law and finance are currently the centre of wide-ranging empirical investigations. This article presents a simple banking model with information asymmetries concerning borrowers' entrepreneurial talent. It is shown that improvements in the enforcement of contract by courts reduce agency problems but can also reduce the bank's incentive to screen borrowers adequately, thus worsening credit allocation. A stricter enforcement of credit contracts, therefore, may be socially harmful even if costlessly achieved. Improvements in accounting standards, however, always make bank screening of borrowers less costly and improve credit allocation and social welfare. Copyright 2005 Royal Economic Society.
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Bibliographic InfoArticle provided by Royal Economic Society in its journal The Economic Journal.
Volume (Year): 115 (2005)
Issue (Month): 500 (01)
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Other versions of this item:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
- K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
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