Improving Bankruptcy Proceedings or Strengthening Sanctions? An Assessment on Anti-Usury Policies
41 Pages Posted: 15 Oct 2008 Last revised: 8 Mar 2011
Date Written: March 2011
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: Suggested Citation