Costs of Enforcement in Developing Countries with Credit Market Imperfections

Abstract

This paper examines the development processes of a country when the degree of verifiability is endogenously determined. We assume that labor input into the enforcement sector is necessary for improving the degree of verifiability. The main result is that although efforts to improve verifiability are important, the determinants of the wages for enforcers, that include the income distribution of the country, are crucial in efforts to implement development processes. Moreover, this paper explains the situation in which a country has high growth rates temporarily even if the technology for contract enforcement is poor, but eventually experiences economic collapse.

Keywords: Credit market imperfection, quality of contract enforcement, degree of verifiability, legal institutions

JEL Classification: E44, F43, O11