Many argue that the primary function of banks is to provide cheap credit, and to this effect advocate strict protection of creditor rights. But banks serve another important function: through project screening, they can improve the allocation of capital across projects. In this paper we show that, in the presence of informational asymmetries, strong creditor protection may lead to competitive market equilibria where banks, protected by high collateral, perform an inefficiently low level of screening. Restrictions on collateral requirements and protection of debtors in bankruptcy may thus increase credit market efficiency.
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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number
10.
Length: Date of creation: 01 Nov 1998 Date of revision: Publication status: Published in RAND Journal of Economics, Vol. 32, No. 4, Winter, 2001 Handle: RePEc:sef:csefwp:10
Find related papers by JEL classification: D8 - Microeconomics - - Information, Knowledge, and Uncertainty G2 - Financial Economics - - Financial Institutions and Services K2 - Law and Economics - - Regulation and Business Law
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RAFAEL LaPORTA & FLORENCIO LOPEZ-de-SILANES & ANDREI SHLEIFER & ROBERT W. VISHNY, .
"Legal Determinants of External Finance,","
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324, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997.
" Legal Determinants of External Finance,"
Journal of Finance,
American Finance Association, vol. 52(3), pages 1131-50, July.
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Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998.
"Law and Finance,"
Journal of Political Economy,
University of Chicago Press, vol. 106(6), pages 1113-1155, December.
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Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996.
"Law and Finance,"
NBER Working Papers
5661, National Bureau of Economic Research, Inc.
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