Housing Collateral Reform and Economic Reallocation

Abstract

This paper investigates the spillover effects of improving creditor rights. Exploiting a reform in Brazil that improved the repossession of housing collateral, we find that stronger creditor protection results in a significant credit reallocation in the economy. Municipalities with higher homeownership experience an increase in credit supply, entrepreneurship, and employment after the reform. However, banks simultaneously restrict credit in low homeownership municipalities, which then experience declines in entrepreneurship and labor demand. The credit reallocation is strongest for financially constrained banks, consistent with high external financing costs. In addition to credit, labor also reallocates from low to high homeownership municipalities.

Keywords: creditor rights, home-backed loans, credit spillovers, financial constraints, entrepreneurship

JEL Classification: G21, K22, O16