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Reputation and the Soft-Budget Constraint

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Author Info
Alexei Deviatov () (New Economic School)
Barry W. Ickes () (Pennsylvania State University)
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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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
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Handle: RePEc:cfr:cefirw:w0078

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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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  1. 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. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
    Other versions:
  3. Janos Kornai & Eric Maskin & Gerard Roland, 2003. "Understanding the Soft Budget Constraint," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1095-1136, December.
    Other versions:
  4. Qian, Yingyi & Xu, Chenggang, 1998. "Innovation and Bureaucracy under Soft and Hard Budget Constraints," Review of Economic Studies, Blackwell Publishing, vol. 65(1), pages 151-64, January. [Downloadable!] (restricted)
  5. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-62, August. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. Dewatripont, M & Maskin, E, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Blackwell Publishing, vol. 62(4), pages 541-55, October. [Downloadable!] (restricted)
  8. Bulow, Jeremy & Rogoff, Kenneth, 1989. "Sovereign Debt: Is to Forgive to Forget?," American Economic Review, American Economic Association, vol. 79(1), pages 43-50, March. [Downloadable!] (restricted)
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  9. 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.
  10. 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. [Downloadable!] (restricted)
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