London School of Economics EOPP: Economic Organisation and Public Policy Programme LSE
EOPP: Economic Organisation and Public Policy Programme

Current EOPP Research:
Creating Collateral: The de Soto Effect and the Political Economy of Legal Reform

Timothy Besley and Maitreesh Ghatak

Abstract:

In advanced economies, collateralization of fixed assets plays a key role in supporting arms-length trade. But effective collateral requires secure property rights so that assets can be pledged against default. Otherwise, trade is restricted to relational contracting within networks which use social collateral. This paper develops a model of contracts and matching of producers and suppliers where collateral matters and property rights are imperfect. In this setting, we study the partial and general equilibrium effects of legal reforms which enhance the use of formal collateral. We lay bare the mechanism by which these reforms expand the scope of arms-length trade and market development. The model is used to gain some insights into the political economy of legal reform and, in particular, the frictions that can inhibit reform in this context.

Related Paper:

Creating Collateral: The de Soto Effect and the Political Economy of Legal Reform