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Bankruptcy Law, Bonded Labor And Inequality

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Author Info

  • Ulf von Lilienfeld-Toal

    (Department of Economics, University of Frankfurt)

  • Dilip Mookherjee

    ()
    (Department of Economics, Boston University)

Abstract

Should the law restrict liability of defaulting borrowers? We abstract from possible benefits arising from limited rationality or risk-aversion of borrowers, contractual incompleteness, or lender moral hazard. We focus instead on general equilibrium implications of liability rules with moral hazard among borrowers with varying wealth. If lenders are on the short side of the market, weakening liability rules lower lender profits, may cause additional exclusion among the poor, but generate additional rents for wealthier borrowers. For certain changes in liability rules (such as a ban on bonded labor, or weakening bankruptcy rules below a wealth threshold) they also raise productivity among borrowers of intermediate wealth. Hence they can be interpreted as a form of efficiency-enhancing redistribution from lenders and poor borrowers to middle class borrowers. Our model provides a possible rationale for why weaker liability rules are observed in wealthier countries.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2005-035.

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Length: 49 pages
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:bos:wpaper:wp2005-035

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  1. Dilip Mookherjee, 1997. "Wealth Effects, Incentives and Productivity," Boston University - Institute for Economic Development 77, Boston University, Institute for Economic Development.
  2. Fan, Wei & White, Michelle J, 2003. "Personal Bankruptcy and the Level of Entrepreneurial Activity," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 543-67, October.
  3. Kanbur, Ravi, 2001. "Obnoxious Markets," Working Papers 127655, Cornell University, Department of Applied Economics and Management.
  4. Reint Gropp & John Karl Scholz & Michelle White, 1996. "Personal Bankruptcy and Credit Supply and Demand," NBER Working Papers 5653, National Bureau of Economic Research, Inc.
  5. Stiglitz, J.E., 1988. "Sharecropping," Papers 11, Princeton, Woodrow Wilson School - Discussion Paper.
  6. Braverman, Avishay & Stiglitz, Joseph E, 1982. "Sharecropping and the Interlinking of Agrarian Markets," American Economic Review, American Economic Association, vol. 72(4), pages 695-715, September.
  7. Basu, Kaushik & Van, Pham Hoang, 1998. "The Economics of Child Labor," American Economic Review, American Economic Association, vol. 88(3), pages 412-27, June.
  8. David Andolfatto, 1999. "A Theory of Inalienable Property Rights," Working Papers 99004, University of Waterloo, Department of Economics, revised Nov 1999.
  9. Patrick Bolton & Howard Rosenthal, 2002. "Political Intervention in Debt Contracts," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1103-1134, October.
  10. Genicot, Garance, 2002. "Bonded labor and serfdom: a paradox of voluntary choice," Journal of Development Economics, Elsevier, vol. 67(1), pages 101-127, February.
  11. Jeremy Berkowitz & Michelle J. White, 2004. "Bankruptcy and Small Firms' Access to Credit," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 69-84, Spring.
  12. Kaushik Basu, 2003. "The Economics and Law of Sexual Harassment in the Workplace," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 141-157, Summer.
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