Aggregate Consequences of Limited Contract Enforceability*
Author(s):
Thomas Cooley, Ramon Marimon and Vincenzo Quadrini
Journal:
Journal of Political Economy 112 (4): 817–47, 2004
Abstract:
We study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts. Because of enforceability problems, contracts are constrained efficient. We show that limited enforceability amplifies the impact of technological innovations on aggregate output. This implies that economies with lower enforceability of contracts are characterized by greater macroeconomic volatility. A key assumption for the amplification result is that defaulting entrepreneurs are not excluded from the market.
Courts*
Author(s):
Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer
Journal:
Quarterly Journal of Economics 118(2): 342–87, 2003
Abstract:
In cooperation with Lex Mundi member law firms in 109 countries, we measure and describe the exact procedures used by litigants and courts to evict a tenant for non-payment of rent and to collect a bounced check. We use these data to construct an index of procedural formalism of dispute resolution for each country. We find that such formalism is systematically greater in civil than in common law countries, and is associated with higher expected duration of judicial proceedings, less consistency, less honesty, less fairness in judicial decisions, and more corruption. These results suggest that legal transplantation may have led to an inefficiently high level of procedural formalism, particularly in developing countries.
Courts and Banks: Effects of Judicial Enforcement on Credit Markets
Author(s):
Tullio Jappelli, Marco Pagano and Magda Bianco
Journal:
Journal of Money, Credit and Banking 37 (2): 223–44, 2005
Abstract:
The costs of enforcing contracts is a key determinant of market performance. We document this point with reference to the credit market. We start by presenting a model of opportunistic debtors and inefficient courts. According to the model, improvements in judicial efficiency reduce credit rationing and increase lending, while have an ambiguous effect on interest rates, depending 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 than elsewhere. International evidence also shows that the depth of mortgage markets is inversely related to costs of mortgage foreclosure and other proxies for judicial inefficiency.
Credit constraints as a barrier to the entry and post-entry growth of firms
Author(s):
Philippe Aghion, Thibault Fally and Stefano Scarpetta
Journal:
Economic Policy, Volume 22 Issue 52, Pages 731 - 779, 2007
Abstract:
Advanced market economies are characterized by a continuous process of creative destruction. Market forces and technological developments play a major role in shaping this process, but institutional and policy settings also influence firms' decision to enter, to expand if successful and to exit if competition becomes unbearable. In this paper we focus on the effects of financial development on the entry of new firms and the expansion of successful new businesses. Drawing from harmonized firm-level data for 16 industrialized and emerging economies, we find that access to finance matters most for the entry of small firms and in sectors that are more dependent upon external finance. This finding is robust to controlling for other potential entry barriers (labour market regulations and entry regulations). On the other hand, financial development has either no effect or a negative effect on entry by large firms. Access to finance also helps new firms expand if successful. Both private credit and stock market capitalization are important for promoting entry and post-entry growth of firms. Altogether, these results suggest that, despite significant progress over the past decade, many countries, including those in Continental Europe, should improve their financial markets so as to get the most out of creative destruction, by encouraging the entry of new (especially small) firms and the post-entry growth of successful young businesses.
Credit market imperfections and the power of the financial accelerator: A theoretical and empirical investigation*
Author(s):
Marco Antonio F.H. Cavalcanti
Journal:
Journal of Macroeconomics, Volume 32, Issue 1, 118-144, 2010
Abstract:
We investigate, both theoretically and empirically, the relationship between credit market imperfections and the degree of shock amplification arising from the so-called financial accelerator. We begin by simulating a dynamic stochastic general equilibrium model with two types of financial frictions-costly contract enforcement and anti-creditor bias in the judicial system. Our model builds on the standard financial accelerator framework of Bernanke et al. (1999), to which we add imperfect judicial enforcement in the line of Krasa and Villamil (2000). According to our simulations, the power of the financial accelerator may either increase or decrease with financial frictions, depending on the source and initial level of such frictions. We then turn to the empirical investigation, based on panel data for 62 countries over 1981–1999. We rely on Djankov et al. (2005) and the World Bank’s Doing Business Database for proxies of credit market imperfections. According to our results, which are consistent with the theoretical model’s main predictions, macroeconomic volatility and the power of the financial accelerator seem to increase with contract enforcement costs, but vary non-monotonically with the degree of anti-creditor bias in the judicial and legal system.
Creditor Rights, Enforcement, and Bank Loans*
Author(s):
Kee-Hong Bae and Vidhan K. Goyal
Journal:
The Journal of Finance 64(2): 823 - 860, 2009
Abstract:
We examine whether differences in legal protection affect the size, maturity, and interest rate spread on loans to borrowers in 48 countries. Results show that banks respond to poor enforceability of contracts by reducing loan amounts, shortening loan maturities, and increasing loan spreads. These effects are both statistically significant and economically large. While stronger creditor rights reduce spreads, they do not seem to matter for loan size and maturity. Overall, we show that variation in enforceability of contracts matters a great deal more to how loans are structured and how they are priced.
Dispute Prevention without Courts in Vietnam
Author(s):
John McMillan and Christopher Woodruff
Journal:
Journal of Law, Economics, and Organization 15 (3): 637–58, 1999
Abstract:
Vietnam’s firms contract without the shadow of the law and only partly in the shadow of the future. Although contracting rests in part on the threat of loss of future business, firms often are willing to renegotiate following a breach, so the retaliation is not as forceful as in the standard repeated-game story and not as effective a sanction. To ensure agreements are kept, firms rely on other devices to supplement repeated-game incentives. Transactions with greater risk of reneging are supported by more elaborate governance structures. Also, firms scrutinize potential trading partners before beginning to transact.
Does Legal Enforcement Affect Financial Transactions? The Contractual Channel in Private Equity*
Author(s):
Josh Lerner and Antoinette Schoar
Journal:
Quarterly Journal of Economics 120 (1): 223–46, 2005
Abstract:
Analyzing 210 developing country private equity investments, we find that transactions vary with nations' legal enforcement, whether measured directly or through legal origin. Investments in high enforcement and common law nations often use convertible preferred stock with covenants. In low enforcement and civil law nations, private equity groups tend to use common stock and debt, and rely on equity and board control. Transactions in high enforcement countries have higher valuations and returns. While relying on ownership rather than contractual provisions may help to alleviate legal enforcement problems, these results suggest that private solutions are only a partial remedy.
Firm Performance and Regulation Explaining International Differences in Entrepreneurship: The Role of Individual Characteristics and Regulatory Constraints*
Author(s):
Silvia Ardagna and Annamaria Lusardi
Journal:
Harvard University; Dartmouth College, Harvard Business School and NBER, 2008
Abstract:
We use a micro dataset that collects information across individuals, countries, and time to investigate the determinants of entrepreneurial activity in thirty-seven developed and developing nations. We focus both on individual characteristics and on countries’ regulatory differences. We show that individual characteristics, such as gender, age, and status in the workforce are important determinants of entrepreneurship, and we also highlight the relevance of social networks, self-assessed skills, and attitudes toward risk. Moreover, we find that regulation plays a critical role, particularly for those individuals who become entrepreneurs to pursue a business opportunity. The individual characteristics that are impacted most by regulation are those measuring working status, social network, business skills, and attitudes toward risk.
Labor's liquidity service and firing costs
Author(s):
Bennett, Herman Z.
Journal:
Labour Economics Volume 18, Issue 1, Pages 102–110, January 2011
Abstract:
This paper studies the specific effect that firing costs can have on firms facing liquidity constraints. When firing costs are zero and a time gap exists between production and its associated revenues, firing allows firms to hold on to their liquid assets by saving on wages, and thus, allows firms to cope better with liquidity shocks when external financing is too costly or unavailable. I refer to this feature as labor's liquidity service. Higher firing costs reduces the value of labor's liquidity service, and thus, increases firms' incentive for hoarding liquidity and reduces firms' demand for production inputs. In addition to this negative effect at the creation margin of production, firing costs have a relatively higher positive effect on the destruction margin of production of financially restricted firms. This paper presents a model that develops these ideas and shows that the presence of firing costs has a stronger negative effect on the output of firms facing liquidity constraints. Regression analysis, based on country-industry panel data sets, provides empirical evidence consistent with the liquidity service effect of firing costs. I find a relatively stronger negative effect of firing costs on the output of industries with higher liquidity requirements and a relatively stronger negative effect of firing costs on the output of small, and more likely financially constrained, firms. (C) 2010 Elsevier B.V. All rights reserved.
Labour market institutions and labour market performance
Author(s):
Lehmann, Hartmut; Muravyev, Alexander
Journal:
Economics of Transition Volume 20, Issue 2, Pages 235–269, April 2012
Abstract:
This paper studies the relationship between labour market institutions and policies and labour market performance using a new and unique dataset that covers the countries of Eastern Europe and Central Asia, which in the last two decades experienced radical economic and institutional transformations. We document a clear trend towards liberalization of labour markets, especially in the countries of the former Soviet Union, but also substantial differences across the countries studied. Our econometric analysis implies that institutions matter for labour market outcomes, and that deregulation of labour markets improves their performance. The analysis also suggests several significant interactions between different institutions, which are in line with the idea of beneficial effects of reform complementarity and broad reform packages.
Regulation and Growth*
Author(s):
Siemon Djankov, Caralee McLiesh and Rita Ramalho
Journal:
Economics Letters 92 (3): 395–401, 2006
Abstract:
Using objective measures of business regulations in 135 countries, we establish that countries with better regulations grow faster. Improving from the worst quartile of business regulations to the best implies a 2.3 percentage point increase in annual growth.
Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade*
Author(s):
Nathan Nunn
Journal:
Quarterly Journal of Economics 122 (2): 569–600, 2007
Abstract:
When relationship-specific investments are necessary for production, under-investment occurs if contracts cannot be enforced. The efficiency loss from under-investment will differ across industries depending on the importance of relationship-specific investments in the production process. As a consequence, a country's contracting environment may be an important determinant of comparative advantage. To test for this, I construct measures of the efficiency of contract enforcement across countries and the importance of relationship-specific investments across industries. I find that countries with better contract enforcement specialize in industries that rely heavily on relationship specific investments. This is true even after controlling for traditional determinants of comparative advantage such as endowments of capital and skilled labor.
The Impact of the Judiciary on Entrepreneurship: Evaluation of Pakistan's "Access to Justice" Programme
Author(s):
Chemin, Matthieu
Journal:
Journal of Public Economics 93 (1-2):114-125, 2009
Abstract:
In 2002, the Pakistani government implemented a judicial reform that cost $350 million or 0.1% of Pakistan's 2002 GDP. This reform did not involve increased incentives for judges to improve efficiency but merely provided them with more training. Nonetheless, the reform had dramatic effects on judicial efficiency and consequently on entrepreneurship: judges disposed of a quarter more cases and entry rate of new firms increased by half due to the reform. Using data from the World Bank Group Entrepreneurship Database, our estimates suggest that this translates into an increase of Pakistan's GDP by 0.5%.
Towards a gendering of the labour market regulation debate
Author(s):
Rubery, Jill
Journal:
Cambridge Journal of Economics, Volume 35, Issue 6, Pages 1103-1126, 2011
Abstract:
Gender equality has become an issue in the labour market regulation debate. Now that evidence suggests that regulation is not always a barrier to good employment performance, recent contributions have focused on its impact in exacerbating within-workforce inequalities, including gender inequality. This article reveals that the evidence supporting this proposition is thin and inconclusive and questions the search for a cross national relationship between regulations and gender. This approach leaves out of consideration the differences in institutional interactions in specific national contexts and the differences in the institution of gender across time and space. This critique is developed through more detailed and context specific analyses of interactions between gender and six areas of labour market regulation. The article concludes by arguing that simply introducing a general gender variable into non gendered analyses of labour markets misleads more than informs and distracts from the development of regulations to promote gender equality.
What Causes Firms to Hide Output? The Determinants of Informality*
Author(s):
Era Dabla-Norris, Mark Gradstein and Gabriela Inchauste
Journal:
Journal of Development Economics 85 (1): 1–27, 2008
Abstract:
In many developing countries, a significant part of economic activity takes place in the informal sector. Earlier work has examined the determinants of the size of the informal sector, focusing separately on factors such as tax and regulation burden, financial market development, and the quality of the legal system. We revisit this issue by using an integrated data set which contains information on all these aspects. Building on a simple analytical framework, we test the channels affecting the degree of informality. We find that the quality of the legal framework is crucially important in determining the size of the informal sector, whereas the significance of taxes, regulations, and financial constraints is reduced in the context of a well functioning legal system, consistent with the presented model. Additionally, firm size is negatively correlated with the propensity to go informal; finance constraints tend to induce informality among smaller firms but not among large firms, whereas legal obstacles induce informality among larger firms.