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The Law and Economics Debate about Secured Lending: Lessons for European LawMaking?


  • John Armour


This review paper is a contribution to a symposium on the 'Future of Secured Credit in Europe'. Its theme is the way in which empirical research has shed light on earlier theoretical literature. These findings tend to suggest that the legal institution of secured credit is, on the whole, socially beneficial, and that such benefits are likely to outweigh any associated social costs. Having made this general claim, the paper then turns to consider the effects of four particular dimensions across which systems of secured credit may differ, and which may therefore be of interest to European law-makers. These are: (i) the scope of permissible collateral; (ii) the efficacy of enforcement; (iii) the priority treatment of secured creditors; and (iv) the mechanisms employed to assist third parties in discovering that security has been granted. In each case, consideration is paid first to the theoretical position, and then empirical findings. It is argued that perhaps the most difficult of these issues for European law-makers concerns the appropriate design of publicity mechanisms for third parties.

Suggested Citation

  • John Armour, 2008. "The Law and Economics Debate about Secured Lending: Lessons for European LawMaking?," Working Papers wp362, Centre for Business Research, University of Cambridge.
  • Handle: RePEc:cbr:cbrwps:wp362
    Note: PRO-2

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    References listed on IDEAS

    1. Diamond, Douglas W., 1993. "Seniority and maturity of debt contracts," Journal of Financial Economics, Elsevier, vol. 33(3), pages 341-368, June.
    2. Stanley D. Longhofer & Joao A.C. Santos, 2003. "The Paradox of Priority," Financial Management, Financial Management Association, vol. 32(1), Spring.
    3. Schwartz, Alan, 1989. "A Theory of Loan Priorities," The Journal of Legal Studies, University of Chicago Press, vol. 18(2), pages 209-261, June.
    4. 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.
    5. Rainer Haselmann & Katharina Pistor & Vikrant Vig, 2010. "How Law Affects Lending," Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 549-580, February.
    6. John Armour, 2006. "Should we redistribute in insolvency," Working Papers wp319, Centre for Business Research, University of Cambridge.
    7. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
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    Cited by:

    1. Armour, J. & Deakin, S. & Mollica, V. & Siems, M.M., 2010. "Law and Financial Development: What we are learning from time-series evidence," Working Papers wp399, Centre for Business Research, University of Cambridge.

    More about this item


    secured credit; European corporate finance; notice filing; enforcement; insolvency priorities;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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