Should Courts Enforce Credit Contracts Strictly ?
AbstractThe linkages between law and finance are currently the centre of wideranging empirical investigations. This article analyse the effects of legal system efficiency on the functioning of the credit market by using a simple banking model with information asymmetries about borrowers'entrepreneurial talent. It is shown that improvements in the enforcement of contracts by courts reduce agency problems, but can also reduce banks' incentive to adequately screen borrowers, thus worsening credit allocation and social welfare. Improvements in accounting standards, however, always make bank screening of borrowers less costly and improve credit allocation.
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Bibliographic InfoPaper provided by Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali in its series Working Papers with number 181.
Date of creation: May 2003
Date of revision:
accounting standards; credit allocation; law enforcement; screening;
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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