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The Law and Economics Debate about Secured Lending: Lessons for European LawMaking?

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  • John Armour
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    Abstract

    This review paper is a contribution to a symposium on the 'Future of Secured Credit in Europe'. Its theme is the way in which empirical research has shed light on earlier theoretical literature. These findings tend to suggest that the legal institution of secured credit is, on the whole, socially beneficial, and that such benefits are likely to outweigh any associated social costs. Having made this general claim, the paper then turns to consider the effects of four particular dimensions across which systems of secured credit may differ, and which may therefore be of interest to European law-makers. These are: (i) the scope of permissible collateral; (ii) the efficacy of enforcement; (iii) the priority treatment of secured creditors; and (iv) the mechanisms employed to assist third parties in discovering that security has been granted. In each case, consideration is paid first to the theoretical position, and then empirical findings. It is argued that perhaps the most difficult of these issues for European law-makers concerns the appropriate design of publicity mechanisms for third parties.

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    File URL: http://www.cbr.cam.ac.uk/pdf/WP362.pdf
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    Bibliographic Info

    Paper provided by ESRC Centre for Business Research in its series ESRC Centre for Business Research - Working Papers with number wp362.

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    Date of creation: Mar 2008
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    Handle: RePEc:cbr:cbrwps:wp362

    Note: PRO-2
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    Web page: http://www.cbr.cam.ac.uk/

    Related research

    Keywords: secured credit; European corporate finance; notice filing; enforcement; insolvency priorities;

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    References

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    1. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    2. Haselmann, Rainer & Pistor, Katharina & Vig, Vikrant, 2006. "How Law Affects Lending," MPRA Paper 157, University Library of Munich, Germany.
    3. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    4. Diamond, Douglas W., 1993. "Seniority and maturity of debt contracts," Journal of Financial Economics, Elsevier, vol. 33(3), pages 341-368, June.
    5. Stanley D. Longhofer & Joao A.C. Santos, 2003. "The Paradox of Priority," Financial Management, Financial Management Association, vol. 32(1), Spring.
    6. Schwartz, Alan, 1989. "A Theory of Loan Priorities," The Journal of Legal Studies, University of Chicago Press, vol. 18(2), pages 209-61, June.
    7. John Armour, 2006. "Should we redistribute in insolvency," ESRC Centre for Business Research - Working Papers wp319, ESRC Centre for Business Research.
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    Cited by:
    1. Armour, J. & Deakin, S. & Mollica, V. & Siems, M.M., 2010. "Law and Financial Development: What we are learning from time-series evidence," ESRC Centre for Business Research - Working Papers wp399, ESRC Centre for Business Research.

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