Defusing Default: Incentives and Institutions by Marco Pagano

By Marco Pagano

How a lot defense should still a country's judicial procedure have the funds for collectors? the reply has far-reaching implications for the functioning of credits markets, rather in constructing areas reminiscent of Latin the USA, the place creditor rights are asymmetric and enforcement usually lax. Defusing Default makes use of quite a few views and instruments, together with theoretical modeling and cross-country facts, to ascertain the prices and advantages of shielding creditor rights. Case reports examine creditor defense in Argentina, Brazil, Chile, Costa Rica, Paraguay and Peru. The reviews locate that better judicial enforcement could aid to make extra credits to be had and enhance the general functionality of the credits industry. one other discovering is that personal contracting in credits markets, together with information-sharing preparations, can assist atone for criminal deficiencies and create incentives to restrict default in international locations the place judicial enforcement is dear or useless. eventually, the e-book explores the political economic climate of debt moratoria by way of analyzing bailouts and financial ruin.

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Latin American countries are then separated from the rest. 4b reveals a number of interesting results. OECD economies have significantly wider debt markets and lower default rates (measured by the ratio of provisions for loan losses to total loans) than non-OECD economies. On average the OECD countries also have lower (real) interest rates, but this difference is not statistically significant. ). 4b. 56 Government surplus (% GDP) Note'. 3 for countries. cies OECD countries pursue and in part by the high degree of respect for the law.

Latin American countries have narrower debt markets and higher default rates (again measured by the ratio of provisions for loan losses to total loans) than the other countries in the sample. They also have a lower index of legal enforcement and, supporting the orthodox view discussed in previous sections, a lower index of creditor rights protection. Despite a significant positive correlation between the debt/GNP ratio and the variable rule of law, the debt/GNP ratio is not significantly correlated with the measure of creditor rights protection.

In a competitive credit market, the total cost of funds to the entrepreneur (including the pecuniary cost associated with the potential loss of the house) is the same as it is for the first scenario, but the entrepreneur bears greater risk in the second. In this case the entrepreneur earns a large profit when the project succeeds (by paying a lower interest rate) but loses the house if the project ends in a fiasco. In the second scenario a risk-averse entrepreneur has fewer incentives to invest.

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