Varieties of creditor protection: insolvency law reform and credit expansion in developed market economies

Simon Deakin,Prabirjit Sarkar,Viviana Mollica

doi:10.1093/ser/mww005

Abstract

We examine the relationship between creditor protection, law reform and credit expansion using longitudinal data for four OECD countries between 1970 and 2005. By decomposing the different elements of creditor protection, we show that civil law countries (France and Germany) have developed a high level of protection for creditors in the form of controls over the management of debtor firms, while common law countries (UK and USA) have arrived at a high degree of protection in relation to secured creditors' contractual rights over firms' assets. Using panel causality tests and dynamic panel data modelling, we show that laws strengthening creditors' control over debtor firms in these four countries had a long-term positive effect on the expansion of private credit, while reforms increasing secured creditors' rights had a negative effect. We explore the implications of our findings for legal origin theory and the varieties of capitalism approach.

Highlights

The idea that law matters for effective capitalist development can be traced back to the writings of Weber (2013)
For the two other components of creditor protection, namely creditor protection relating to debtor control and that relating to credit contracts, both the VAR and VEC tests show a causal impact on credit expansion
We can see some evidence of reverse causality: this suggests that credit expansion can cause changes in the law relating to credit contracts

Summary

Introduction

The idea that law matters for effective capitalist development can be traced back to the writings of Weber (2013). Comparing the experience of industrializing countries of Western Europe with other countries, he concluded that a rational legal system is a precondition for the emergence of capitalism. This perspective treats the legal system as an endowment, created by a fixed investment, which determines the path of development ‘without itself being subject to change’ North (1990) presents a similar viewpoint He has argued that rich nations are those which have succeeded in forming institutions which are able to protect property rights and provide an environment for the enforcement of contracts.

Results

Discussion

Conclusion