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Bankruptcy Law, Bonded Labor And Inequality

  • Ulf von Lilienfeld-Toal

    (Department of Economics, University of Frankfurt)

  • Dilip Mookherjee

    ()

    (Department of Economics, Boston University)

Should the law restrict liability of defaulting borrowers? We abstract from possible benefits arising from limited rationality or risk-aversion of borrowers, contractual incompleteness, or lender moral hazard. We focus instead on general equilibrium implications of liability rules with moral hazard among borrowers with varying wealth. If lenders are on the short side of the market, weakening liability rules lower lender profits, may cause additional exclusion among the poor, but generate additional rents for wealthier borrowers. For certain changes in liability rules (such as a ban on bonded labor, or weakening bankruptcy rules below a wealth threshold) they also raise productivity among borrowers of intermediate wealth. Hence they can be interpreted as a form of efficiency-enhancing redistribution from lenders and poor borrowers to middle class borrowers. Our model provides a possible rationale for why weaker liability rules are observed in wealthier countries.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2005-035.

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Length: 49 pages
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:bos:wpaper:wp2005-035
Contact details of provider: Postal: 270 Bay State Road, Boston, MA 02215
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Fax: 617-353-4449
Web page: http://www.bu.edu/econ/

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  1. Basu, Kaushik, 2003. "The Economics and Law of Sexual Harassment in the Workplace," Working Papers 03-07, Cornell University, Center for Analytic Economics.
  2. Reint Gropp & John Karl Scholz & Michelle White, 1996. "Personal Bankruptcy and Credit Supply and Demand," NBER Working Papers 5653, National Bureau of Economic Research, Inc.
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  8. Mookherjee, Dilip, 1997. "Wealth Effects, Incentives, and Productivity," Review of Development Economics, Wiley Blackwell, vol. 1(1), pages 116-33, February.
  9. Genicot, Garance, 2002. "Bonded labor and serfdom: a paradox of voluntary choice," Journal of Development Economics, Elsevier, vol. 67(1), pages 101-127, February.
  10. Fan, Wei & White, Michelle J, 2003. "Personal Bankruptcy and the Level of Entrepreneurial Activity," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 543-67, October.
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