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How Much Should Debtors be Punished in Case of Default?

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  • Aloisio Araujo
  • Bruno Funchal

Abstract

This study investigates the relationship between debtor punishment and the development of the credit market. We empirically analyze how the level of debtor punishment relates to the credit market expansion. We find evidence that an increase in debtor punishment tends to produce a positive effect on credit markets for states with low level of punishment and a negative effect for states with high level of punishment. Hence, there is an intermediate level of debtor punishment that maximizes the size of the personal credit market. This intermediate level accounts for the need of creditors’ protection to reduce moral hazard, to encourage the supply of credit, and for the need to protect borrowers from a bad state of nature. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Aloisio Araujo & Bruno Funchal, 2015. "How Much Should Debtors be Punished in Case of Default?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 47(2), pages 229-245, April.
    • Handle: RePEc:kap:jfsres:v:47:y:2015:i:2:p:229-245
    DOI: 10.1007/s10693-013-0186-y
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    2. Wenli Li & Ishani Tewari & Michelle J. White, 2019. "Using Bankruptcy to Reduce Foreclosures: Does Strip-Down of Mortgages Affect the Mortgage Market?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 55(1), pages 59-87, February.

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    More about this item

    Keywords

    Credit; Bankruptcy; Regulation and Business Law; Personal Bankruptcy Law; JEL Codes; E51; G33; K2; K35;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K2 - Law and Economics - - Regulation and Business Law
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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