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Financial contracting with enforcement externalities

Listed author(s):
  • Drozd, Lukasz A.

    (Federal Reserve Bank of Philadelphia)

  • Serrano-Padial, Ricardo

    (Drexel University)

Contract enforceability in financial markets often depends on the aggregate actions of agents. For example, high default rates in credit markets can delay legal enforcement or reduce the value of collateral, incentivizing even more defaults and potentially affecting credit supply. We develop a theory of credit provision in which enforceability of individual contracts is linked to aggregate behavior. The central element behind this link is enforcement capacity, which is endogenously determined by investments in enforcement infrastructure. Our paper sheds new light on the emergence of credit crunches and the relationship between enforcement infrastructure, economic growth, and political economy distortions.

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File URL: https://www.philadelphiafed.org/-/media/research-and-data/publications/working-papers/2016/wp16-01.pdf?la=en
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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 16-1.

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Length: 49 pages
Date of creation: 20 Jan 2016
Handle: RePEc:fip:fedpwp:16-1
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  1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
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