Credit Cycles and Creditor Rights

Martin Kornejew, Shohini Kundu and Müller, Karsten

No 21848, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Do creditor rights amplify or dampen economic fluctuations? Using a panel of 39 countries from 1978 to 2019, we show that credit expansions in economies with strong creditor protection are followed by smaller output losses, fewer non-performing loans, and a greater reallocation of credit away from unproductive sectors. Firm-level evidence from Delaware’s adoption of antirecharacterization laws shows that well-protected creditors cut credit to low-productivity firms while easing borrowing constraints for productive ones. Overall, our findings indicate that stronger creditor rights dampen the output losses of credit booms by facilitating a more efficient reallocation of capital.

Keywords: Creditor rights; Credit booms; Capital allocation (search for similar items in EconPapers)
Date: 2026-08
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