Bargaining power and enforcement in credit markets

Garance Genicot, Debraj Ray

    Research output: Contribution to journalArticle

    Abstract

    In a credit market with enforcement constraints, we study the effects of a change in the outside options of a potential defaulter on the terms of the credit contract, as well as on borrower payoffs. The results crucially depend on the allocation of "bargaining power" between the borrower and the lender. We prove that there is a crucial threshold of relative weights such that if the borrower has power that exceeds this threshold, her expected utility must go up whenever her outside options come down. But if the borrower has less power than this threshold, her expected payoff must come down with her outside options. In the former case a deterioration in outside options brought about, say, by better enforcement, must create a Lorenz improvement in state-contingent consumption. In particular, borrower consumption rises in all "bad" states in which loans are taken. In the latter case, in contrast, the borrower's consumption must decline, at least for all the bad states. These disparate findings within a single model permit us to interpret existing literature on credit markets in a unified way.

    Original languageEnglish (US)
    Pages (from-to)398-412
    Number of pages15
    JournalJournal of Development Economics
    Volume79
    Issue number2
    DOIs
    StatePublished - Apr 2006

    Fingerprint

    credit market
    bargaining power
    bargaining
    market
    loan
    credit
    consumption
    enforcement
    Bargaining power
    Enforcement
    Credit markets
    Outside options

    Keywords

    • Bargaining power
    • Courts
    • Credit markets
    • D02
    • D4
    • Enforcement
    • G29
    • K35
    • O12
    • O16

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Bargaining power and enforcement in credit markets. / Genicot, Garance; Ray, Debraj.

    In: Journal of Development Economics, Vol. 79, No. 2, 04.2006, p. 398-412.

    Research output: Contribution to journalArticle

    Genicot, Garance ; Ray, Debraj. / Bargaining power and enforcement in credit markets. In: Journal of Development Economics. 2006 ; Vol. 79, No. 2. pp. 398-412.
    @article{21d4ec9f2ac8430fa78372be80abe5e5,
    title = "Bargaining power and enforcement in credit markets",
    abstract = "In a credit market with enforcement constraints, we study the effects of a change in the outside options of a potential defaulter on the terms of the credit contract, as well as on borrower payoffs. The results crucially depend on the allocation of {"}bargaining power{"} between the borrower and the lender. We prove that there is a crucial threshold of relative weights such that if the borrower has power that exceeds this threshold, her expected utility must go up whenever her outside options come down. But if the borrower has less power than this threshold, her expected payoff must come down with her outside options. In the former case a deterioration in outside options brought about, say, by better enforcement, must create a Lorenz improvement in state-contingent consumption. In particular, borrower consumption rises in all {"}bad{"} states in which loans are taken. In the latter case, in contrast, the borrower's consumption must decline, at least for all the bad states. These disparate findings within a single model permit us to interpret existing literature on credit markets in a unified way.",
    keywords = "Bargaining power, Courts, Credit markets, D02, D4, Enforcement, G29, K35, O12, O16",
    author = "Garance Genicot and Debraj Ray",
    year = "2006",
    month = "4",
    doi = "10.1016/j.jdeveco.2006.01.006",
    language = "English (US)",
    volume = "79",
    pages = "398--412",
    journal = "Journal of Development of Economics",
    issn = "0304-3878",
    publisher = "Elsevier",
    number = "2",

    }

    TY - JOUR

    T1 - Bargaining power and enforcement in credit markets

    AU - Genicot, Garance

    AU - Ray, Debraj

    PY - 2006/4

    Y1 - 2006/4

    N2 - In a credit market with enforcement constraints, we study the effects of a change in the outside options of a potential defaulter on the terms of the credit contract, as well as on borrower payoffs. The results crucially depend on the allocation of "bargaining power" between the borrower and the lender. We prove that there is a crucial threshold of relative weights such that if the borrower has power that exceeds this threshold, her expected utility must go up whenever her outside options come down. But if the borrower has less power than this threshold, her expected payoff must come down with her outside options. In the former case a deterioration in outside options brought about, say, by better enforcement, must create a Lorenz improvement in state-contingent consumption. In particular, borrower consumption rises in all "bad" states in which loans are taken. In the latter case, in contrast, the borrower's consumption must decline, at least for all the bad states. These disparate findings within a single model permit us to interpret existing literature on credit markets in a unified way.

    AB - In a credit market with enforcement constraints, we study the effects of a change in the outside options of a potential defaulter on the terms of the credit contract, as well as on borrower payoffs. The results crucially depend on the allocation of "bargaining power" between the borrower and the lender. We prove that there is a crucial threshold of relative weights such that if the borrower has power that exceeds this threshold, her expected utility must go up whenever her outside options come down. But if the borrower has less power than this threshold, her expected payoff must come down with her outside options. In the former case a deterioration in outside options brought about, say, by better enforcement, must create a Lorenz improvement in state-contingent consumption. In particular, borrower consumption rises in all "bad" states in which loans are taken. In the latter case, in contrast, the borrower's consumption must decline, at least for all the bad states. These disparate findings within a single model permit us to interpret existing literature on credit markets in a unified way.

    KW - Bargaining power

    KW - Courts

    KW - Credit markets

    KW - D02

    KW - D4

    KW - Enforcement

    KW - G29

    KW - K35

    KW - O12

    KW - O16

    UR - http://www.scopus.com/inward/record.url?scp=33645903865&partnerID=8YFLogxK

    UR - http://www.scopus.com/inward/citedby.url?scp=33645903865&partnerID=8YFLogxK

    U2 - 10.1016/j.jdeveco.2006.01.006

    DO - 10.1016/j.jdeveco.2006.01.006

    M3 - Article

    VL - 79

    SP - 398

    EP - 412

    JO - Journal of Development of Economics

    JF - Journal of Development of Economics

    SN - 0304-3878

    IS - 2

    ER -