Does Poor Legal Enforcement Make Households Credit-Constrained?

FAME Research Paper No. 81

59 Pages Posted: 6 Aug 2003

See all articles by Daniela Fabbri

Daniela Fabbri

University of Lausanne - Institute of Banking and Finance (IBF)

Mario Padula

University "Ca' Foscari" of Venice; CSEF

Date Written: January 2003

Abstract

This paper analyzes the relation between the quality of the legal enforcement of loan contracts and the allocation of credit to households, both theoretically and empirically. We use a model of household credit market with secured debt contracts, where the judicial system affects the cost incurred by banks to actually repossess the collateral. The model shows that the working of the judicial system affects both the probability of being credit-constrained and the equilibrium amount of debt. In the empirical part, we test our predictions using data on Italian households and on the performance of Italian judicial districts. Controlling for household characteristics, unobserved heterogeneity at judicial district level and aggregate shocks, we document that an increment in the backlog of trials pending has a statistically and economically significant positive effect on the household probability of being turned down from the credit. Endowing the households living in high-cost judicial districts like Campobasso or Caltanissetta (in southern Italy) with the best enforcement in the sample would reduce the probability of their being credit-constrained by 70% and 63%, respectively. This effect is stronger for poorer than for wealthier households. Moreover, we document that an increment in the backlog of trials pending reduces the availability of credit for poorer households but, surprisingly, has the opposite effect on wealthy households, whose debt volume increases. Again, this effect is found to be significant both statistically and economically.

Keywords: Judicial enforcement, Borrowing restrictions, Collateral

JEL Classification: D12, G21, G33, K12, K41, K42

Suggested Citation

Fabbri, Daniela and Padula, Mario, Does Poor Legal Enforcement Make Households Credit-Constrained? (January 2003). FAME Research Paper No. 81. Available at SSRN: https://ssrn.com/abstract=411904 or http://dx.doi.org/10.2139/ssrn.411904

Daniela Fabbri (Contact Author)

University of Lausanne - Institute of Banking and Finance (IBF) ( email )

CH-1015 Lausanne
Switzerland
+41 21 692 3369 (Phone)
+41 21 692 3435 (Fax)

HOME PAGE: www.hec.unil.ch/dfabbri

Mario Padula

University "Ca' Foscari" of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy
+390412349181 (Phone)
+390412349176 (Fax)

CSEF

Via Don Melillo I
Fisciano, Salerno, 84084
Italy

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