Legal enforcement, collateral and heterogeneity of project financing contracts

This paper employs mechanism design to study the effects of imperfect legal enforcement on optimal scale of projects, borrowing interest rates and the probability of default. The analysis departs from an environment that combines asymmetric information about cash flows and limited commitment by borrowers. Incentive for repayment comes from the possibility of liquidation of projects by a court, but courts are costly and may fail to liquidate. The value of liquidated assets can be used as collateral: it is transferred to the lender when courts liquidate. Examples reveal that costly use of courts may be optimal, which contrasts with results from most limited commitment models, where punishments are just threats, never applied in optimal arrangements. I show that when voluntary liquidation is allowed, both asymmetric information and uncertainty about courts are necessary conditions for legal punishments ever to be applied. Numerical solutions for several parametric specifications are presented, allowing for heterogeneity on initial wealth and variability of project returns. In all such solutions, wealthier individuals borrow with lower interest rates and run higher scale enterprises, which is consistent with stylized facts. The reliability of courts has a consistently positive effect on the scale of projects. However its effect on interest rates is subtler and depends essentially on the degree of curvature of the production function. Numerical results also show that the possibility of collateral seizing allows comovements of the interest rates and the probability of repayment.

Exclusivity contracts and competition : the case of the Brazilian fuels market

Exclusivity contracts can help stations by providing brand-value that allows them to obtain higher profits, relative to unbranded retailers. However, branded retailers may have a stronger negative effect over its competitors’ profits. It is not clear which one of these two effects dominates (brand-value vs competition effect). Therefore, the impact of exclusivity over the number of participants in the downstream market is not determined. In this paper, I empirically study the effects of exclusivity agreements on competition in the Brazilian gasoline sector. In order to do so, I estimate an entry model of endogenous product-type choices using data of retailers’ locations and contract choices along with data from the 2010 Brazilian Census. I use my estimates to simulate entry decisions under two counterfactual scenarios: i) mandatory exclusivity and ii) no exclusivity.