DP7259 The de Soto Effect

Author(s): Timothy J. Besley , Maitreesh Ghatak

Publication Date: April 2009

Keyword(s): Hernando de Soto , collateral , credit markets

JEL(s): G20 , G28 , K11 , O16

Programme Areas: Development Economics

Link to this Page: www.cepr.org/pubs/dps/DP7259.asp

This paper explores the consequences of creating and improving property rights so that fixed assets can be used as collateral. This has become a cause célèbre of Hernando de Soto whose views are influential in debates about policy reform concerning property rights. Hence, we refer to the economic impact of such reforms as the de Soto effect. We explore the logic of the argument for credit contracts, both in isolation, and in market equilibrium. We show that the impact will vary with the degree of market competition. Where competition is weak, it is possible that borrowers will be worse off when property rights improve. We discuss the implications for optimal policy and the political economy of policy reform.