Should Courts Enforce Credit Contracts Strictly

Dados Bibliográficos

ID9718534
AutoresAlberto Zazzaro (0000-0003-2647-6296, Marche Polytechnic University, autor correspondente)
Ano2005
Volume115
Fascículo500
Páginas166-184
Data de publicação2005-01-01
Peer ReviewedSim
Open AccessSim
TipoARTICLE
PeriódicoThe Economic Journal (JOURNAL)
Identificadores do periódicoISSN: 0013-0133 • E-ISSN: 1468-0297
EditoraOxford University Press (OUP) (PUBLISHER)
DOI10.1111/j.1468-0297.2004.00964.x
OpenAlexW2740196562
IdiomaEN
Referências citadas30

The intimate linkages between law and finance are currently the centre of wide-ranging empirical investigations. This article presents a simple banking model with information asymmetries concerning borrowers' entrepreneurial talent. It is shown that improvements in the enforcement of contract by courts reduce agency problems but can also reduce the bank's incentive to screen borrowers adequately, thus worsening credit allocation. A stricter enforcement of credit contracts, therefore, may be socially harmful even if costlessly achieved. Improvements in accounting standards, however, always make bank screening of borrowers less costly and improve credit allocation and social welfare. Copyright 2005 Royal Economic Society

Business · Economics · Law and economics · Political science · Banking stability, regulation, efficiency · Corporate Finance and Governance · Corporate Insolvency and Governance · Law