When do creditor rights work?

Creditor-friendly laws are generally associated with more credit to the private sector and deeper financial markets. But laws mean little if they are not upheld in the courts. The authors hypothesize that the effectiveness of creditor rights is strongly linked to the efficiency of contract enforcement. This hypothesis is tested using firm level data on 27 European countries in 2002 and 2005. The analysis finds that firms have more access to bank credit in countries with better creditor rights, but the association between creditor rights and bank credit is much weaker in countries with inefficient courts. Exploiting the panel dimension of the data and the fact that creditor rights change over time, the authors show that the effect of a change in creditor rights on change in bank credit increases with court enforcement. In particular, a unit increase in the creditor rights index will increase the share of bank loans in firm investment by 27 percent in a country at the 10th percentile of the enforcement time distribution (Lithuania). However, the increase will be only 7 percent in a country at the 80th percentile of this distribution (Kyrgyzstan). Legal protections of creditors and efficient courts are strong complements.Debt Markets,,Banks&Banking Reform,Emerging Markets,Labor Policies

When do enterprises prefer informal credit ?

This paper tests the hypothesis that enterprises may forgo formal finance in lieu of informal credit by choice. They do so to avoid the additional regulatory scrutiny and harassment that engaging with the formal financial sector invites. We test this hypothesis using enterprise-level data on 3,564 enterprises in 29 countries. In this sample, enterprises finance approximately 57 percent of their working capital requirements with external finance. This external finance comes from formal sources, such as commercial banks (53 percent) and informal sources (42 percent), such as trade creditors, or family and friends. In our sample, 14 percent of enterprises rely exclusively on informal finance. We find that the likelihood of enterprises preferring to only use informal finance is inversely related to the quality of the regulatory environment, particularly the quality of tax administration and overall governance. For example, we find that when an enterprise has been asked for bribes by tax inspectors, it is 17 percent more likely to prefer informal finance.Access to Finance,Banks&Banking Reform,Debt Markets,,Small and Medium Size Enterprises

THE DIFFERENTIAL IMPACT OF CORRUPTION ON MICROENTERPRISES IN RUSSIA

Over the past decade, the repressive legal and regulatory environment in transition economies has received considerable attention in the literature. In Russia, this framework has resulted in an environment in which rules and regulations govern almost all aspects of economic activity. The elaborate system of regulations with which firms must comply, in combination with a lack of accountability for regulatory enforcers, has created a corrupt cadre of government officials who frequently engage in rent-seeking behavior while monitoring and enforcing firm compliance. The objective of this paper is to investigate the manner in which corruption affects micro and small enterprises in Russia. Empirical evidence suggests that micro and small enterprises vary substantially in reporting how problematic corruption is for their enterprise. A theoretical model explores why extortion from regulators may occur in a non-uniform manner across firms. The theoretical model postulates that government regulators customize the nature of their rent-seeking activities towards, similar to a price-discriminating monopolist facing hidden information. The model shows that production technologies, input choices, and other firm characteristics such as location play a role in determining the bribe price that a regulator will charge a firm, as well as the number of times he will return to collect it. Supportive evidence comes from survey data collected on Russian microenterprises. The model described above is tested using econometrics, and numerical simulations.Political Economy,

The Legal Regulatory Environment for Micro and Small Enterprises in Russia: Survey Evidence From Samara

Exact date of working paper unknown

THE DIFFERENTIAL IMPACT OF CORRUPTION ON MICROENTERPRISES IN RUSSIA

Over the past decade, the repressive legal and regulatory environment in transition economies has received considerable attention in the literature. In Russia, this framework has resulted in an environment in which rules and regulations govern almost all aspects of economic activity. The elaborate system of regulations with which firms must comply, in combination with a lack of accountability for regulatory enforcers, has created a corrupt cadre of government officials who frequently engage in rent-seeking behavior while monitoring and enforcing firm compliance. The objective of this paper is to investigate the manner in which corruption affects micro and small enterprises in Russia. Empirical evidence suggests that micro and small enterprises vary substantially in reporting how problematic corruption is for their enterprise. A theoretical model explores why extortion from regulators may occur in a non-uniform manner across firms. The theoretical model postulates that government regulators customize the nature of their rent-seeking activities towards, similar to a price-discriminating monopolist facing hidden information. The model shows that production technologies, input choices, and other firm characteristics such as location play a role in determining the bribe price that a regulator will charge a firm, as well as the number of times he will return to collect it. Supportive evidence comes from survey data collected on Russian microenterprises. The model described above is tested using econometrics, and numerical simulations