Legal System Efficiency, Information Production, and Technological Choice: A Banking Model

Recent empirical studies have shown that the structure of the legal system and the efficiency in law enforcement influence the financial structure of the firm, their ability to gain access to capital markets, and the growth rate of economic systems. This paper uses a simple banking model with ex-ante and ex-post information asymmetries between borrowers and lenders to analyse the effects that the efficiency of the legal system may exert on the credit market. Its main conclusious are: (i) an efficient legal system reduces loan interest rates and, in the majority of the cases, the average amount of defaults on loans; (ii) an improvement in the efficiency of legal institutions improves banks' selection procedures only provided the efficiency of the legal system is already high.