Working Paper: NBER ID: w13559
Authors: Fernando A. Broner; Alberto Martin; Jaume Ventura
Abstract: There is a large and growing literature that studies the effects of weak enforcement institutions on economic performance. This literature has focused almost exclusively on primary markets, in which assets are issued and traded to improve the allocation of investment and consumption. The general conclusion is that weak enforcement institutions impair the workings of these markets, giving rise to various inefficiencies. But weak enforcement institutions also create incentives to develop secondary markets, in which the assets issued in primary markets are retraded. This paper shows that trading in secondary markets counteracts the effects of weak enforcement institutions and, in the absence of further frictions, restores efficiency.
Keywords: enforcement problems; secondary markets; economic performance; sovereign risk
JEL Codes: F34; F36; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| weak enforcement institutions (P37) | inefficiencies in investment and consumption allocation (D61) |
| secondary markets (G10) | restored efficiency in the economy (E65) |
| secondary markets (G10) | incentivizes governments to enforce payments (H26) |
| secondary markets (G10) | smooth consumption (D10) |
| secondary markets (G10) | reduce costs associated with defaults (G33) |
| secondary markets (G10) | enable transfer of assets from less favored debtors to favored debtors (G33) |
| secondary markets (G10) | allow debtors to insure against enforcement errors (G33) |
| secondary markets (G10) | lead to optimal consumption plans despite enforcement risks (D10) |