Judicial Risk and Credit Market Performance: Micro Evidence from Brazilian Payroll Loans

Ana Carla A. Costa and Joao De Mello

No 12252, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A large body of literature has stressed the institution-development nexus as critical in explaining differences in countries' economic performance. The empirical evidence, however, has been mainly at the aggregate level, associating macro performance with measures of quality of institutions. This paper, by relating a judicial decision on the legality of payroll loans in Brazil to bank-level decision variables, provides micro evidence on how creditor legal protection affects market performance. Payroll loans are personal loans with principal and interests payments directly deducted from the borrowers' payroll check, which, in practice, makes a collateral out of future income. In June 2004, a high-level federal court upheld a regional court ruling that had declared payroll deduction illegal. Using personal loans without payroll deduction as a control group, we assess whether the ruling had an impact on market performance. Evidence indicates that it had an adverse impact on risk perception, interest rates, and amount lent.

JEL-codes: D86 G21 L19 O16 (search for similar items in EconPapers)
Date: 2006-05
New Economics Papers: this item is included in nep-fin and nep-fmk
Note: CF
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Citations: View citations in EconPapers (16)

Published as Judicial Risk and Credit Market Performance: Micro Evidence from Brazilian Payroll Loans , Ana Carla A. Costa, João M. P. De Mello. in Financial Markets Volatility and Performance in Emerging Markets , Edwards and Garcia. 2008

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