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Economic performance, creditor protection, and labour inflexibility

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  • Felipe Balmaceda
  • Ronald Fischer

Abstract

We present a static general equilibrium model of an open economy where agents are heterogeneous in terms of observable wealth and there are endogenous credit constraints due to imperfect creditor protection. Improved credit protection, harder assets, and more efficient bankruptcy procedures increase output, investment, and credit penetration. Better credit protection and harder assets lead to higher interest rate spreads. In a capital constrained (unconstrained) economy, greater (lower) wealth inequality leads to higher (lower) investment and output. Interest rate spreads are lower in richer and more unequal economies in terms of their wealth distribution. We also show that increased labour protection leads to lower wages and output in the presence of credit market imperfections. Nevertheless, increased protection benefits workers in (and owners of) firms with strong balance sheets. Copyright 2010 Oxford University Press 2009 All rights reserved, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 62 (2010)
Issue (Month): 3 (July)
Pages: 553-577

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Handle: RePEc:oup:oxecpp:v:62:y:2010:i:3:p:553-577

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Citations

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Cited by:
  1. Viviana Fernández & Brian M. Lucey, 2008. "Emerging Markets Variance Shocks: Local or International in Origin?," Documentos de Trabajo 251, Centro de Economía Aplicada, Universidad de Chile.
  2. Felipe Balmaceda, 2013. "On the Optimality of One-size-fits-all Contracts: The Limited Liability Case," Working Papers 39, Facultad de Economía y Empresa, Universidad Diego Portales.
  3. Felipe Balmaceda & Juan Esconar, 2013. "Trust in Cohesive Communities," Documentos de Trabajo 295, Centro de Economía Aplicada, Universidad de Chile.
  4. Fischer, Ronald & Valenzuela, Patricio, 2013. "Financial openness, market structure and private credit: An empirical investigation," Economics Letters, Elsevier, vol. 121(3), pages 478-481.
  5. Antonio Romero-Medina & Matteo Triossi, 2012. "Neutral Mergers Between Bilateral Markets," Documentos de Trabajo 292, Centro de Economía Aplicada, Universidad de Chile.
  6. Balmaceda, Felipe & Fischer, Ronald D. & Ramirez, Felipe, 2014. "Financial liberalization, market structure and credit penetration," Journal of Financial Intermediation, Elsevier, vol. 23(1), pages 47-75.
  7. Janiak, Alexandre, 2008. "Welfare in Models of Trade with Heterogeneous Firms," IZA Discussion Papers 3803, Institute for the Study of Labor (IZA).

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