Template-Type: ReDIF-Paper 1.0
Author-Name:Dilip Mookherjee	 
Author-X-Name-First: Dilip
Author-X-Name-Last: Mookherjee
Author-Email: dilipm@bu.edu
Author-Workplace-Name: Institute for Economic Development, Boston University
Author-Name: Ulf von Lilienfeld-Toal
Author-X-Name-First: Ulf
Author-X-Name-Last:von Lilienfeld-Toal
Author-Email: 
Author-Workplace-Name: Department of Economics, University of Frankfurt
Title: Bankruptcy Law, Bonded Labor and Inequality
Abstract: Should the law restrict liability of defaulting borrowers? We abstract from possible benefits
arising from limited rationality or risk-aversion of borrowers, contractual incompleteness,
or lender moral hazard. We focus instead on general equilibrium implications of liability rules
with moral hazard among borrowers with varying wealth. If lenders are on the short side
of the market, weakening liability rules lower lender profits, may cause additional exclusion
among the poor, but generate additional rents for wealthier borrowers. For certain changes in
liability rules (such as a ban on bonded labor, or weakening bankruptcy rules below a wealth
threshold) they also raise productivity among borrowers of intermediate wealth. Hence they
can be interpreted as a form of efficiency-enhancing redistribution from lenders and poor
borrowers to middle class borrowers. Our model provides a possible rationale for why weaker
liability rules are observed in wealthier countries.

Length: 49 pages
Creation-Date: 2005-09
Revision-Date: 
Publication-Status: 
File-URL:http://www.bu.edu/econ/workingpapers/papers/Dilip%20Mookherjee/wp2005/bkruptbondlab3.pdf
File-Format: Application/pdf
File-Function: 
Number: DP-155
Classification-JEL: 
Keywords: 
Handle: RePEc:bos:iedwpr:dp-155