Judicial Risk and Credit Market Performance: Micro Evidence from Brazilian Payroll Loans

32 Pages Posted: 25 May 2006 Last revised: 25 Jun 2010

See all articles by Ana Carla A. Costa

Ana Carla A. Costa

Central Bank of Brazil

Joao De Mello

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

Date Written: May 2006

Abstract

A large body of literature has stressed the institution-development nexus as critical in explaining differences in countries%u2019 economic performance. The empirical evidence, however, has been mainly at the aggregate level, associating macro performance with measures of quality of institutions. This paper, by relating a judicial decision on the legality of payroll loans in Brazil to bank-level decision variables, provides micro evidence on how creditor legal protection affects market performance. Payroll loans are personal loans with principal and interests payments directly deducted from the borrowers%u2019 payroll check, which, in practice, makes a collateral out of future income. In June 2004, a high-level federal court upheld a regional court ruling that had declared payroll deduction illegal. Using personal loans without payroll deduction as a control group, we assess whether the ruling had an impact on market performance. Evidence indicates that it had an adverse impact on risk perception, interest rates, and amount lent.

Suggested Citation

Costa, Ana Carla A. and De Mello, Joao M. P., Judicial Risk and Credit Market Performance: Micro Evidence from Brazilian Payroll Loans (May 2006). NBER Working Paper No. w12252, Available at SSRN: https://ssrn.com/abstract=903890

Ana Carla A. Costa

Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Joao M. P. De Mello (Contact Author)

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

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