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Enforcement Problems and Secondary Markets

Fernando Broner, Alberto Martin and Jaume Ventura

No 6498, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: There is a large and growing literature that studies the effects of weak enforcement institutions on economic performance. This literature has focused almost exclusively on primary markets, in which assets are issued and traded to improve the allocation of investment and consumption. The general conclusion is that weak enforcement institutions impair the workings of these markets, giving rise to various inefficiencies. But weak enforcement institutions also create incentives to develop secondary markets, in which the assets issued in primary markets are retraded. This paper shows that trading in secondary markets counteracts the effects of weak enforcement institutions and, in the absence of further frictions, restores efficiency.

Keywords: default; enforcement; secondary markets; sovereign risk; weak law enforcement (search for similar items in EconPapers)
JEL-codes: F34 F36 G15 (search for similar items in EconPapers)
Date: 2007-09
New Economics Papers: this item is included in nep-ure
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