Soft budget constraints in a dynamic general equilibrium model
AbstractThis paper considers an overlapping generations model in which capital investment is financed in a credit market with adverse selection. Lenders’ inability to commit ex-ante not to bailout ex-post, together with a wealthy position of entrepreneurs gives rise to the soft budget constraint syndrome, i.e. the absence of liquidation of poor performing firms on a regular basis. This problem arises endogenously as a result of the interaction between the economic behavior of agents, without relying on political economy ex- planations. We found the problem more binding along the business cycle, providing an explanation to creditors leniency during booms in some Latin- American countries in the late seventies and early nineties.
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Bibliographic InfoPaper provided by UNIVERSIDAD DEL ROSARIO in its series DOCUMENTOS DE TRABAJO with number 006885.
Date of creation: 28 Feb 2010
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-17 (All new papers)
- NEP-CTA-2010-04-17 (Contract Theory & Applications)
- NEP-DGE-2010-04-17 (Dynamic General Equilibrium)
- NEP-MAC-2010-04-17 (Macroeconomics)
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