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Should Courts Enforce Credit Contracts Strictly ?

  • Alberto ZAZZARO


    (Universita' Politecnica delle Marche, Dipartimento di Economia)

The 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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Paper provided by Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali in its series Working Papers with number 181.

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Length: 30
Date of creation: May 2003
Date of revision:
Handle: RePEc:anc:wpaper:181
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  19. 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.
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