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The Cost and Benefits of the Strict Protection of Creditor Rights: Theory and Evidence

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Author Info
Atilano Jorge Padilla
Alejandro Requejo
Abstract

We first review the existing theories on the implications of the various regulations that protect creditors. We then empirically investigate the cost and benefits of the strict protection of creditors` rights. Building on the sample of 49 countries developed by La Porta et al. (1998), we study the impact on debt volume, interest rates and default rates of both an aggregate measure of the degree of protection of creditor rights and efficiency of the judicial system. We confirm previous results showing that an effective judicial system is crucial for the development and optimal performance of the credit market. Yet, in contrast to previous studies, we find no conclusive evidence on the sign and magnitude of the effect of creditors` rights protection on credit market efficiency. Instead, macroeconomic stability appears to be crucial for the outgrowth of wide debt markets.

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Paper provided by Inter-American Development Bank, Research Department in its series RES Working Papers with number 3084.

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Date of creation: May 2000
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Handle: RePEc:idb:wpaper:3084

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Rafael LaPorta & Florencio Lopez de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Harvard Institute of Economic Research Working Papers 1788, Harvard - Institute of Economic Research.
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  2. Michael Manove & A. Jorge Padilla, 1999. "Banking (Conservatively) with Optimists," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 324-350, Summer. [Downloadable!] (restricted)
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  3. Meador, Mark, 1982. "The effects of mortgage laws on home mortgage rates," Journal of Economics and Business, Elsevier, vol. 34(2), pages 143-148. [Downloadable!] (restricted)
  4. Besanko, David & Thakor, Anjan V, 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 671-89, October. [Downloadable!] (restricted)
  5. Gropp, Reint & Scholz, John Karl & White, Michelle J, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 217-51, February.
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  6. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June. [Downloadable!] (restricted)
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  7. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," RES Working Papers 4026, Inter-American Development Bank, Research Department. [Downloadable!]
  8. Baird, Douglas G., 1991. "The initiation problem in bankruptcy," International Review of Law and Economics, Elsevier, vol. 11(2), pages 223-232, September. [Downloadable!] (restricted)
  9. repec:fth:inadeb:318 is not listed on IDEAS
  10. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December. [Downloadable!] (restricted)
  11. Tullio Jappelli & Marco Pagano, 1999. "Information Sharing in Credit Markets: International Evidence," RES Working Papers 3069, Inter-American Development Bank, Research Department. [Downloadable!]
  12. 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. [Downloadable!] (restricted)
  13. Robert Gertner & David Scharfstein, 1991. "A Theory of Workouts and the Effects of Reorganization Law," NBER Technical Working Papers 0103, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Domowitz, Ian & Eovaldi, Thomas L, 1993. "The Impact of the Bankruptcy Reform Act of 1978 on Consumer Bankruptcy," Journal of Law & Economics, University of Chicago Press, vol. 36(2), pages 803-35, October.
  15. Chan, Yuk-Shee & Thakor, Anjan V, 1987. " Collateral and Competitive Equilibria with Moral Hazard and Private Information," Journal of Finance, American Finance Association, vol. 42(2), pages 345-63, June. [Downloadable!] (restricted)
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  16. Carr, Jack L & Mathewson, G Frank, 1988. "Unlimited Liability as a Barrier to Entry," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 766-84, August. [Downloadable!] (restricted)
  17. Alston, Lee J, 1984. "Farm Foreclosure Moratorium Legislation: A Lesson from the Past," American Economic Review, American Economic Association, vol. 74(3), pages 445-57, June. [Downloadable!] (restricted)
  18. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September. [Downloadable!] (restricted)
  19. Svensson, Jakob, 1998. "Investment, property rights and political instability: Theory and evidence," European Economic Review, Elsevier, vol. 42(7), pages 1317-1341, July. [Downloadable!] (restricted)
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  1. Bottazzi, L. & Da Rin, M. & Hellmann, T., 2008. "What is the Role of Legal Systems in Financial Intermediation? Theory and Evidence," Discussion Paper 2008-30, Tilburg University, Center for Economic Research. [Downloadable!]
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  2. Berglöf, Erik & Bolton, Patrick, 2003. "The Great Divide and Beyond - Financial Architecture in Transition," CEPR Discussion Papers 3476, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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