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How much should debtors be punished in case of default?

  • Aloisio Araujo

    (EPGE-FGV/RJ and IMPA)

  • Bruno Funchal

    ()

    (FUCAPE Business School)

This study investigates the relationship between debtor punishment and the development of the credit market. We empirically analyze how the level of debtor punishment relates to the credit market expansion. We find evidence that an increase in debtor punishment tends to produce a positive effect on credit markets for states with low level of punishment and a negative effect for states with high level of punishment. Hence, there is an intermediate level of debtor punishment that maximizes the size of the personal credit market. This intermediate level accounts for the need of creditors' protection to reduce moral hazard, to encourage the supply of credit, and for the need to protect borrowers from a bad state of nature

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File URL: http://www.fucape.br/_public/workingpapers/41-2013.pdf
File Function: Primeira Versão, 2013
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Paper provided by Fucape Business School in its series Fucape Working Papers with number 41.

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Length: 30 pages
Date of creation: Oct 2013
Date of revision:
Publication status: Published in Fucape Working Papers, Outubro 2013
Handle: RePEc:bbz:fcpwps:41
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