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The de Soto effect

  • Timothy Besley
  • Maitreesh Ghatak

This paper explores the consequences of creating and improving property rights so that fixed assets can be used as collateral. This has become a cause célèbre of Hernando de Soto whose views are influential in debates about policy reform concerning property rights. Hence, we refer to the economic impact of such reforms as the de Soto effect. We explore the logic of the argument for credit contracts, both in isolation, and in market equilibrium. We show that the impact will vary with the degree of market competition. Where competition is weak, it is possible that borrowers will be worse off when property rights improve. We discuss the implications for optimal policy and the political economy of policy reform.

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File URL: http://eprints.lse.ac.uk/25429/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 25429.

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Length: 34 pages
Date of creation: Apr 2009
Date of revision:
Handle: RePEc:ehl:lserod:25429
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Web page: http://www.lse.ac.uk/
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  1. 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.
  2. José M. Liberti & Atif R. Mian, 2010. "Collateral Spread and Financial Development," Journal of Finance, American Finance Association, vol. 65(1), pages 147-177, 02.
  3. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
  4. Karlan, Dean & Mobius, Markus & Rosenblat, Tanya & Szeidl, Adam, 2009. "Trust and Social Collateral," Staff General Research Papers 13026, Iowa State University, Department of Economics.
  5. Biais, Bruno & Mariotti, Thomas, 2008. "Credit, Wages and Bankruptcy Laws," IDEI Working Papers 289, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Kranton, Rachel E. & Swamy, Anand V., 1999. "The hazards of piecemeal reform: british civil courts and the credit market in colonial India," Journal of Development Economics, Elsevier, vol. 58(1), pages 1-24, February.
  7. Sebastian Galiani & Ernesto Schargrodsky, 2005. "Property Rights for the Poor: Effects of Land Titling," Business School Working Papers proprightspoor, Universidad Torcuato Di Tella.
  8. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
  9. Francesco Caselli & Nicola Gennaioli, 2007. "Economics and Politics of Alternative Institutional Reforms," NBER Working Papers 12833, National Bureau of Economic Research, Inc.
  10. Ulf von Lilienfeld-Toal & Dilip Mookherjee, 2010. "The Political Economy of Debt Bondage," American Economic Journal: Microeconomics, American Economic Association, vol. 2(3), pages 44-84, August.
  11. Markus Goldstein & Christopher Udry, 2005. "The Profits of Power: Land Rights and Agricultural Investment in Ghana," Working Papers 929, Economic Growth Center, Yale University.
  12. Abhijit V. Banerjee & Esther Duflo & Kaivan Munshi, 2003. "The (Mis)Allocation of Capital," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 484-494, 04/05.
  13. Dilip Mookherjee & Debraj Ray, 2002. "Contractual Structure and Wealth Accumulation," American Economic Review, American Economic Association, vol. 92(4), pages 818-849, September.
  14. Raghuram G. Rajan & Luigi Zingales, 2006. "The Persistence of Underdevelopment:Institutions, Human Capital or Constituencies?," Working Papers id:447, eSocialSciences.
  15. Field, Erica Marie, 2005. "Property Rights and Investment in Urban Slums," Scholarly Articles 3634150, Harvard University Department of Economics.
  16. Genicot, Garance, 2002. "Bonded labor and serfdom: a paradox of voluntary choice," Journal of Development Economics, Elsevier, vol. 67(1), pages 101-127, February.
  17. Simon Johnson & John McMillan & Christopher Woodruff, 2002. "Property Rights and Finance," American Economic Review, American Economic Association, vol. 92(5), pages 1335-1356, December.
  18. Erica Field, 2005. "Property Rights and Investment in Urban Slums," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 279-290, 04/05.
  19. Krishna B. Kumar & John G. Matsusaka, 2004. "Village versus Market Social Capital: An Approach to Development," Development and Comp Systems 0408003, EconWPA.
  20. Ghatak, Maitreesh & Morelli, Massimo & Sjostrom, Tomas, 2007. "Entrepreneurial talent, occupational choice, and trickle up policies," Journal of Economic Theory, Elsevier, vol. 137(1), pages 27-48, November.
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