No. 1287 - Court efficiency and aggregate productivity: the credit channel

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by Guzmán González-Torres and Giacomo RodanoJuly 2020

The paper studies the effects of bankruptcy procedure efficiency on aggregate productivity in an economy populated by firms with heterogeneous productivity levels. Improving these procedures (by increasing and speeding up recovery rates) affects credit supply by reducing the expected value of losses creditors suffer in the event of default.

Improving bankruptcy procedures reduces borrowing rates and increases the quantity of credit supplied, prompting firms to increase their debt to expand production. At the same time, it enables relatively unproductive firms to enter the market and survive. The net effect on aggregate productivity turns out to be positive, due to the marked increase in size of the most productive firms in the economy.

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