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Reputation and the Soft-Budget Constraint

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  • Alexei Deviatov

    () (New Economic School)

  • Barry W. Ickes

    () (Pennsylvania State University)

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    Abstract

    We study the role of reputation in dealing with the soft-budget constraint. We examine whether the reputation of a borrower can lead to repayment in an environment where enforcement is weak. We also introduce lenders’ reputation and examine how this impacts on the allocation of borrowers. We find that reputation can harden budget constraint and improve welfare, although it can never fully eliminate softness. We also show that lenders who acquire a reputation for being tough can earn higher profits than lenders with reputations for being soft.

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    File URL: http://www.cefir.ru/papers/WP78Deviatov.pdf
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    Bibliographic Info

    Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0078.

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    Length: 46 pages
    Date of creation: Jul 2005
    Date of revision:
    Handle: RePEc:cfr:cefirw:w0078

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    1. Janos Kornai & Eric Maskin & Gerard Roland, 2002. "Understanding the Soft Budget Constraint," Economics Working Papers 0019, Institute for Advanced Study, School of Social Science.
    2. Steve Tadelis, 1997. "What's in a Name? Reputation as a Tradeable Asset," Working Papers 97033, Stanford University, Department of Economics.
    3. Qian, Yingyi & Xu, Chenggang, 1998. "Innovation and Bureaucracy under Soft and Hard Budget Constraints," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 151-64, January.
    4. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-62, August.
    5. Janet Mitchell, 2000. "Theories of Soft Budget Constraints and the Analysis of Banking Crises," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(1), pages 59-100, March.
    6. Dewatripont, M & Maskin, E, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 541-55, October.
    7. Cole, Harold L & Kehoe, Patrick J, 1998. "Models of Sovereign Debt: Partial versus General Reputations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 55-70, February.
    8. Berglof, Erik & Roland, Gerard, 1998. "Soft Budget Constraints and Banking in Transition Economies," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 18-40, March.
    9. Alexeev, Michael & Kim, Sunghwan, 2004. "Lenders' reputation and the soft budget constraint," Economics Letters, Elsevier, vol. 84(1), pages 69-73, July.
    10. Kornai, Janos, 1998. "The Concept of the Soft Budget Constraint Syndrome in Economic Theory," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 11-17, March.
    11. Jeremy I. Bulow & Kenneth Rogoff, 1988. "Sovereign Debt: Is To Forgive To Forget?," NBER Working Papers 2623, National Bureau of Economic Research, Inc.
    12. Mathias Dewatripont & Eric Maskin & Gérard Roland, 1999. "Soft budget constraints and transition," ULB Institutional Repository 2013/9663, ULB -- Universite Libre de Bruxelles.
    13. Eric Maskin & Chenggang Xu, 2001. "Soft budget constraint theories: From centralization to the market," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 9(1), pages 1-27, March.
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