NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Ana Carla A. Costa, Joao M.P. De Mello

NBER Working Paper No. 12252
Issued in May 2006
NBER Program(s):   CF

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.

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Document Object Identifier (DOI): 10.3386/w12252

Published: 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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