Prohibitions on punishments in private contracts
AbstractIn most contemporary economies loan contracts that mandate exclusionary penalties such as imprisonment or other non-pecuniary punishments for defaulting debtors are illegal, despite the fact that in some cases contracting parties might gain by being able to use them. A possible rationale for contracting restrictions of this type is that exclusion imposes negative externalities on individuals not party to the original loan contract. We explore the ability of such externalities to account for these restrictions. We contrast exclusion with enforceable collateral seizure, a widespread feature of developed financial systems. We also consider "behavioral" agents who underestimate their chances of being punished, and show that overconfidence of this type is a less compelling justification for restrictions on exclusionary punishments than is often argued.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Financial Intermediation.
Volume (Year): 18 (2009)
Issue (Month): 4 (October)
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Web page: http://www.elsevier.com/locate/inca/622875
Other versions of this item:
- Philip Bond & Andrew F. Newman, 2006. "Prohibitions on Punishments in Private Contracts," Boston University - Department of Economics - Working Papers Series WP2006-060, Boston University - Department of Economics.
- Andrew Newman & Philip Bond, 2004. "Prohibitions on Punishments in Private Contracts," Econometric Society 2004 North American Winter Meetings 143, Econometric Society.
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
- N2 - Economic History - - Financial Markets and Institutions
- J83 - Labor and Demographic Economics - - Labor Standards - - - Workers' Rights
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