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Oxford Economic Papers Advance Access published online on October 22, 2009
Oxford Economic Papers, doi:10.1093/oep/gpp033
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© Oxford University Press 2009 All rights reserved

Economic performance, creditor protection, and labour inflexibility

Felipe Balmaceda* and Ronald Fischer{dagger}

*Center for Applied Economics (CEA), Department of Industrial Engineering, Universidad de Chile, Av. República 701, Santiago, Chile; e-mail: fbalmace{at}dii.uchile.cl
{dagger}Center for Applied Economics (CEA), Department of Industrial Engineering, Universidad de Chile; e-mail: rfischer{at}dii.uchile.cl

JEL classifications: G38, E44, D53


  Abstract

We present a static general equilibrium model of an open economy where agents are heterogeneous in terms of observable wealth and there are endogenous credit constraints due to imperfect creditor protection. Improved credit protection, harder assets, and more efficient bankruptcy procedures increase output, investment, and credit penetration. Better credit protection and harder assets lead to higher interest rate spreads. In a capital constrained (unconstrained) economy, greater (lower) wealth inequality leads to higher (lower) investment and output. Interest rate spreads are lower in richer and more unequal economies in terms of their wealth distribution. We also show that increased labour protection leads to lower wages and output in the presence of credit market imperfections. Nevertheless, increased protection benefits workers in (and owners of) firms with strong balance sheets.


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