The paper is forthcoming in Quarterly Journal of Economics. The paper can be found here.
Abstract: This paper explores the consequences of improving property rights to facilitate the use of fixed assets as collateral, popularly attributed to the influential policy advocate Hernando de Soto. We use an equilibrium model of a credit market with moral hazard to characterize the theoretical effects, and also develop a quantitative analysis using data from Sri Lanka.
We show that the effects are likely to be non-linear and heterogeneous by wealth group. They also depend on the extent of competition between lenders. There can be significant increases in profts and reductions in interest rates when credit markets are competitive. However, since these are due to reductions in moral hazard, i.e. increased effort, the welfare gains tend to be modest when cost of effort is taken into account. Allowing for an extensive margin where borrowers gain access to the credit market, can make these effects larger depending on the underlying wealth distribution.