The Legal Enforcement of Credit Contracts and the Level of Investment

Daniela Fabbri ()
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Daniela Fabbri: Universitat Pompeu Fabra and CSEF, Università di Salerno, http://www.csef.it

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: This paper analyses the effect of the degree of the legal enforcement of credit contracts on the level of private investment. We use a model of corporate finance with moral hazard and collateralized asset. We introduce in the model a third agent: the government, which is responsible for the enforcement of credit contracts. In particular we consider the right to repossess two different types of assets in case of default: inside collateral and outside collateral. We show that the existence of credit constraints and their level depend on the degree of enforceability of creditor rights, provided by the public sector. Moreover, we find the optimal degree of legal enforcement and we investigate how it depends on the firms' wealth endowment.

Keywords: moral hazard; collateral; corporate finance; legal enforcement (search for similar items in EconPapers)
JEL-codes: G30 K1 K4 (search for similar items in EconPapers)
Date: 2001-04-01
New Economics Papers: this item is included in nep-law and nep-mfd
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:57

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