The de Soto Effect

This paper explores the consequences of creating and improvingproperty rights so that …xed assets can be used as collateral. Thishas become a cause célèbre of Hernando de Soto whose views areinfluential in debates about policy reform concerning property rights.Hence, we refer to the economic impact of such reforms as the de Sotoe¤ect. We explore the logic of the argument for credit contracts, bothin isolation, and in market equilibrium. We show that the impact willvary with the degree of market competition. Where competition isweak, it is possible that borrowers will be worse o¤ when propertyrights improve. We discuss the implications for optimal policy andthe political economy of policy reform.[...]