Defusing Default: Incentives and Institutions

How much protection should a country's judicial system afford creditors? The answer has far-reaching implications for the functioning of credit markets, particularly in developing regions such as Latin America, where creditor rights are uneven and enforcement often lax. Defusing Default uses a variety of perspectives and tools, including theoretical modeling and cross-country evidence, to examine the costs and benefits of protecting creditor rights. Case studies look at creditor protection in Argentina, Brazil, Chile, Costa Rica, Paraguay and Peru. The studies find that more effective judicial enforcement would help to make more credit available and improve the overall performance of the credit market. Another finding is that private contracting in credit markets, including information-sharing arrangements, can help compensate for legal deficiencies and create incentives to limit default in countries where judicial enforcement is costly or ineffective. Finally, the book explores the political economy of debt moratoria by examining bailouts and bankruptcy.