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The Mystery of Capital under Adverse Selection: The Net Effects of Titling Policies

The Mystery of Capital under Adverse Selection: The Net Effects of Titling Policies. Luis H.B. Braido (FGV Rio) Carlos E. da Costa (FGV Rio) Bev Dahlby (U. Alberta). Introduction.

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The Mystery of Capital under Adverse Selection: The Net Effects of Titling Policies

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  1. The Mystery of Capital under Adverse Selection: The Net Effects of Titling Policies Luis H.B. Braido (FGV Rio) Carlos E. da Costa (FGV Rio) Bev Dahlby (U. Alberta)

  2. Introduction • Hernando de Soto (2000) advocates economic policies that enable the poor in developing countries to use a larger fraction of their total wealth to collateralize investments by providing them with title to their homes and land. • Higher access to credit, investments & welfare. • Prediction theoretically valid when the credit market collapses due to asymmetric information and absence of collateral (Akerlof, 1970).

  3. Introduction • Empirical Evidence: Galiani & Schargrodsky (2006). • Natural experiment in the allocation of land titles in a poor suburban area of Buenos Aires. • Weak average treatment effect over credit access.

  4. Introduction • General model of adverse selection in which credit market does not collapses. • Projects characterized by their net return and probability of success. • Titling policies reduce the welfare of agents endowed with projects with high reward and low probability of success. • Projects with different characteristics are financed by the same debt contract with safe projects subsidizing risky projects.

  5. Introduction • de Soto's thesis is not universally valid. • This cross-subsidization (intrinsic to the debt market) generates externalities that are absent in de Soto's argument. • Insights for empirical investigations: • Titling programs change the composition of investments. • They need not affect the average treatment effect typically measured in randomized experiments.

  6. Model Projects: (p,R) distributed according to a density function f(p,R) Iliquid Capital: H>0 Colateralizable Fraction: α>0 Liquid Capital: K≥0 Competitive Debt Market: θ=(K*,H*,i) Risky Financing: αH+K<1

  7. Model Safe Investors: Entrepreneurs:

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