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Trust and Law in Credit Markets

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  • Koji Asano

Abstract

This study examines the coevolution of trust and legal institutions in a model of competitive credit markets plagued by asymmetric information. When entrepreneurs’ relative payoff to productive activities versus cheating is private information, dishonest ones, who intend to cheat, can enter credit markets and be cross‐subsidized by honest ones, who engage in productive activities. To exploit this benefit, dishonest entrepreneurs demand weak legal enforcement through the political process. This rent‐seeking behaviour interacts with the formation of trust, generating an underdevelopment trap with weak enforcement and distrust. Technological advancement may encourage entrepreneurs’ rent‐seeking and aggravate distrust.

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  • Koji Asano, 2022. "Trust and Law in Credit Markets," Economica, London School of Economics and Political Science, vol. 89(354), pages 332-361, April.
    • Handle: RePEc:bla:econom:v:89:y:2022:i:354:p:332-361
    DOI: 10.1111/ecca.12400
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    1. Chenchen Fan & Mingming Jiang & Bo Zhang, 2024. "Beyond cultural norms: how does historical rice farming affect modern firms' family control?," Economica, London School of Economics and Political Science, vol. 91(363), pages 770-808, July.
    2. Koji Asano, 2022. "Trust and Law in Credit Markets," Economica, London School of Economics and Political Science, vol. 89(354), pages 332-361, April.

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    More about this item

    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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