Motivated by empirical evidences that show a great dispersion among Brazilian banks' interest spreads we have developed an imperfect competition model where the need to monitor loans and the heterogeneity of the demand for credit create market niches in which it is possible to charge higher interest rates on credit. The difference in the level of competition between areas can generate an inefficient allocation of resources in the economy, particularly harming less developed areas.

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This paper considers an OLG model in which investment is financed in a credit market with adverse selection. Lenders’ inability to commit ex-ante not to bailout ex-post, and a wealthy position of entrepreneurs give rise to the soft budget constraint syndrome. The setting is an alternative to political economy models. We found the problem more binding in good times, providing a framework that reflects creditors leniency during booms in some Latin-American countries in the seventies.

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This article analyzes the firm dynamics when the entrepreneurs have limited enforcement to the financial contracts. We characterize the optimal constrained contract under this imperfection in the presence of productivity and interest rate fluctuations. We show that along the optimal contract productivity and interest rate fluctuations have amplified effects on the firms dynamics beyond what would be predicted in the case of perfect enforceability.

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When limiting the extent of the hidden economy, tax inspection may be a substitute to private monitoring of investment projects. When enforcing investors protection, the judiciary system is a complement to private governance as it decreases private monitoring costs. Corporate income tax may finance government expenditures the judiciary system enforcing investors protection. On the other hand, corporate income tax increases enhance tax evasion.

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This paper tests the importance of the initial net wealth on the decision to become entrepreneurs for the Italian case. The evidence is that household wealth is important and its impact is decreasing as wealth increases. The effect of wealth is stronger when legal enforcement of loan contracts is worse. However, conditional on becoming entrepreneurs, net wealth seems to have no impact on the business size.

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