Improving Bankruptcy Proceedings or Strengthening Sanctions? An Assessment on Anti-Usury Policies

41 Pages Posted: 15 Oct 2008 Last revised: 8 Mar 2011

See all articles by Lisa Crosato

Lisa Crosato

Università degli Studi di Milano-Bicocca - Department of Statistics

Lucia Dalla Pellegrina

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS)

Date Written: March 2011

Abstract

We explore the combined effects of increasing both the efficiency of bankruptcy proceedings and the severity of expected sanctions on the probability that credit agreements involve usu-rious interest rates. Depending upon the institutional setup, we find that that either: a) marginal improvements in the efficiency of proceedings are likely to curb usury, while strengthening sanctions is in effective; or b) marginal improvements in the efficiency of proceedings are likely to foster usury, while more severe sanctions have deterrence effects. The main policy implication is the convenience of polarizing the allocation of public resources in either bankruptcy laws or criminal law enforcement in case of reforms. Likewise, transition from severe repression to depenalization associated to more active prevention requires massively shifting resources since marginal interventions could end up with adverse outcome. Furthermore, in a dynamic setting, policy interventions may fail when borrowers' higher wealth (collateral endowment) implies increasing inequality in its distribution. There-fore, countries undertaking judicial reforms should be aware of the growth path they choose during transition.

Keywords: illegal financial markets, usury, judicial efficiency, transition economies, lognormal distribution

JEL Classification: K14, K42, D31

Suggested Citation

Crosato, Lisa and Dalla Pellegrina, Lucia, Improving Bankruptcy Proceedings or Strengthening Sanctions? An Assessment on Anti-Usury Policies (March 2011). Paolo Baffi Centre Research Paper No. 2008-30; CLEA 2008 Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1283767 or http://dx.doi.org/10.2139/ssrn.1283767

Lisa Crosato (Contact Author)

Università degli Studi di Milano-Bicocca - Department of Statistics

Via Bicocca degli Arcimboldi, 8
Milan, MI 20126
Italy

Lucia Dalla Pellegrina

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

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