Collusion and Commitment in Bank Bailout
AbstractCollusion and soft budget constraint are two conspicuous phenomena in transition economies¡¯ banking system. Literature has separately investigated those two phenomena from theoretical point of views. However, the cross-point of both phenomena has been neglected in the research of banking regulation. The present paper addresses this issue in a simple model of two-period contract with termination at the end of the first period. By comparing the two hierarchies -- ¡°bank-firm¡± and ¡°government-bank-firm¡±, we show that the government¡¯s non-commitment and banking bailout cause inefficiency in the contact relationship. Moreover, after introducing collusion possibility, non-commitment of the government increases the stakes, or bribes, which the collusive bank can extract, and makes it more costly for the government to implement this contract. However, taking into account the fact that the bank is collusive, the government who aims to prevent collusion will switch to the other equilibrium where she sticks to her commitment and excludes collusion from the contract relationship. Here, collusion plays a role as a hardening budget constraint device. Some policy implications are suggested at the end.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Industrial Organization with number 0509011.
Length: 38 pages
Date of creation: 27 Sep 2005
Date of revision:
Note: Type of Document - pdf; pages: 38
Contact details of provider:
Web page: http://126.96.36.199
soft budget constraint; collusion; moral hazard; commitment; transition; centralized economy.;
Find related papers by JEL classification:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
- L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
- P31 - Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-04 (All new papers)
- NEP-FIN-2005-10-04 (Finance)
- NEP-FMK-2005-10-04 (Financial Markets)
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.:
- Kornai, J, 1979. "Resource-Constrained versus Demand-Constrained Systems," Econometrica, Econometric Society, vol. 47(4), pages 801-19, July.
- Olsen, Trond E & Torsvik, Gaute, 1998.
"Collusion and Renegotiation in Hierarchies: A Case of Beneficial Corruption,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 413-38, May.
- Olsen, T.E. & Torsvik, G., 1998. "Collusion and Renegotiation in Hierarchies: A Case of Beneficial Corruption," Norway; Department of Economics, University of Bergen 179, Department of Economics, University of Bergen.
- Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
- Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
- Shleifer, Andrei & Vishny, Robert W, 1994. "Politicians and Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 995-1025, November.
- Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
- Kofman, Fred & Lawarree, Jacques, 1993. "Collusion in Hierarchical Agency," Econometrica, Econometric Society, vol. 61(3), pages 629-56, May.
- David Begg & Richard Portes, 1993.
"Enterprise debt and economic transformation (Financial restructuring of the state sector in Central and Eastern Europe),"
The Economics of Transition,
The European Bank for Reconstruction and Development, vol. 1(1), pages 116-117, 01.
- Begg, David & Portes, Richard, 1992. "Enterprise Debt and Economic Transformation: Financial Restructuring of the State Sector in Central and Eastern Europe," CEPR Discussion Papers 695, C.E.P.R. Discussion Papers.
- Carlin, Wendy & Mayer, Colin, 1992. "Restructuring Enterprises in Eastern Europe," CEPR Discussion Papers 700, C.E.P.R. Discussion Papers.
- Kornai, Janos, 1992. "The Socialist System: The Political Economy of Communism," OUP Catalogue, Oxford University Press, number 9780198287766.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If references are entirely missing, you can add them using this form.