Transition and Financial Collapse

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Transition and Financial Collapse

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Uhlig, H. (Tilburg University, Center for Economic Research)

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Harald Uhlig

Abstract

One of the many problems facing the countries in transition from socialism to capitalism after the initial phase of privatization and restructuring is the lack of proven entrepreneurial talent in addition to a low initial level of capital. New entrepreneurs might find it hard to finance their start-up enterprises. This paper therefore argues that a financial collapse and thus a collapse of the new entrepreneurial sector might occur. First, the lack of financial intermediation in transition economies is examined empirically before proceeding to a theoretical model. Using IMF data on claims to the private sector, we find that the extent of financial intermediation in these countries is comparable to developing rather than industrialized countries. The theoretical part analyzes an overlapping generations model with heterogenous entrepreneurial qualities and private information. A financial collapse can result, if young agents are too poor to provide enough collateral for financing a small project to prove their qualities as entrepreneur and no proven middle-aged entrepreneurs are available who can be entrusted with enough funds to run big projects. In that case, the economy contracts to an agricultural steady state. Possible remedies are discussed. In particular, large inequality or a large-scale, long-lasting government program of subsidizing investment help to overcome the danger of a financial collapse.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 66.

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Date of creation: 1995
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Handle: RePEc:dgr:kubcen:199566

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Paper
- Harald Uhlig, 1993. "Transition and Financial Collapse," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH.

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Gersbach, H. & Uhlig, H., 1998. "Debt contracts, collapse and regulation as competition phenomena," Discussion Paper 1, Tilburg University, Center for Economic Research. [Downloadable!]
Other versions:
- Gersbach, Hans & Uhlig, Harald, 1997. "Debt Contracts, Collapse and Regulation as Competition Phenomena," CEPR Discussion Papers 1742, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Hans Gersbach, 2002. "Financial Intermediation and the Creation of Macroeconomic Risks," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
Gersbach, Hans & Wenzelburger, Jan, 2005. "Do Risk Premia Protect from Banking Crises?," CEPR Discussion Papers 4935, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Other versions:
- Hans Gersbach & Jan Wenzelburger, 2004. "Do Risk Premia Protect from Banking Crises," Levine's Bibliography 122247000000000356, UCLA Department of Economics. [Downloadable!]
Hans Gersbach, 2001. "The Dynamics of Deposit Insurance and the Consumption Trap," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]

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