Courts and Credit in Mexico

Abstract

I study the effect of efficiency in commercial law enforcement on lendingvolume and default rate in the Mexican credit market. I focus in credit bycommercial banks going to the private sector and the private housing sector.By using factor analysis, I construct variables for the quality, fairness andspeed of the judicial branch of government of the 32 Mexican federal entitiesin the years 2003, 2006, 2008, 2010 and 2012. I regress lending volumeand default rate on these judicial variables under a random effects model.Because I have more detailed data for the last two versions of the study, Ialso use a first difference model for the years 2010 and 2012. My findingsagree with the results of other longitudinal studies in Latin America: moreefficient commercial law enforcement increases lending volume and decreasesthe default rate of the credit market. In particular, I find that when thejudicial system is more efficient, commercial banks lend more possibly becausetheir loans have higher expected returns and homeowners default lessbecause their collateral is more efficiently seized.