Friday, October 9, 2009: 2:20 PM
This study investigates the relationship between debtors' punishment and the development of the credit market. As the main goal we empirically analyze what the optimal level of debtors' punishment is to provide the greatest credit market development. In line with earlier theoretical findings from Dubey, Geanakoplos and Shubik (2005), we find that there is an intermediate level of debtors' punishment that maximizes the size of the private credit market. This intermediate level accounts for the need of creditors' protection to reduce moral hazard, encouraging the supply of credit and, for the need to protect borrowers from a bad state of nature.