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Economic performance, creditor protection and labor inflexibility

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  • Ronald Fischer

Abstract

We present a static general equilibrium model of an economy with agents with heterogeneous wealth and endogenous credit constraints created by partial loan recovery rates. Higher loan recovery rates and better bankruptcy protection increase output and credit penetration, while the former raises the average interest rate spread and the latter decreases it. We also study the interaction of credit constraint with differences in wealth distribution across countries. In a closed economy, higher loan recovery rates and better bankruptcy legislation raise the prime interest rate, as well as the interest rate spread. We incorporate a labor market in order to analyze the interaction between increased labor protection and credit restrictions. We find that stronger labor protection leads to lower wages and output. Nevertheless they will be supported by workers in firms with strong balance sheets and opposed by workers and employers in firms with weak balance sheets. JEL Class.: G38, E44, D53.

Suggested Citation

  • Ronald Fischer, 2008. "Economic performance, creditor protection and labor inflexibility," Documentos de Trabajo 250, Centro de Economía Aplicada, Universidad de Chile.
    • Handle: RePEc:edj:ceauch:250
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    More about this item

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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