Reputation and the Soft-Budget Constraint
AbstractWe 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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Bibliographic InfoPaper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0078.
Length: 46 pages
Date of creation: Jul 2005
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Find related papers by JEL classification:
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
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