Working Paper: CEPR ID: DP3347
Authors: Magda Bianco; Tullio Jappelli; Marco Pagano
Abstract: The cost of enforcing contracts is a key determinant of market performance. We document this point with reference to the credit market in a model of opportunistic debtors and inefficient courts. According to the model, improvements in judicial efficiency should reduce credit rationing and increase lending, with an ambiguous effect on interest rates that depends on banking competition and on the type of judicial reform. These predictions are supported by panel data on Italian provinces and by cross-country evidence. In Italian provinces with longer trials or large backlogs of pending trials, credit is less widely available. International evidence also shows that the depth of mortgage markets is inversely related to the costs of mortgage foreclosure and other proxies for judicial inefficiency.
Keywords: credit market; enforcement; interest rates; judicial efficiency
JEL Codes: G20; K40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| improvements in judicial efficiency (K41) | increased lending (G21) |
| increased lending (G21) | reduced credit rationing (G21) |
| judicial efficiency (K41) | reduced credit rationing (G21) |
| judicial inefficiency (K41) | reduced lending (G21) |
| judicial efficiency (K41) | increased fraction of recoverable loans (G51) |
| increased fraction of recoverable loans (G51) | increased lending (G21) |
| judicial efficiency (K41) | higher default rates (G33) |
| judicial inefficiency (K41) | higher risk profile of borrowers (G21) |