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Quality of Institutions, Credit Markets and Bankruptcy

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  • Hainz, Christa

Abstract

The number of firm bankruptcies is surprisingly low in economies with poor institutions. We study a model of bank-firm relationship and show that the bank?s decision to liquidate bad firms has two opposing effects. First, the bank receives a payoff if a firm is liquidated. Second, it loses the rent from incumbent customers that is due to its informational advantage. We show that institutions must improve significantly in order to yield a stable equilibrium in which the optimal number of firms is liquidated. There is also a range where improving institutions may decrease the number of bad firms liquidated. --

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Bibliographic Info

Paper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Kiel 2005 with number 18.

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Date of creation: 2005
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Handle: RePEc:zbw:gdec05:3491

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Keywords: Credit markets; institutions; bank competition; information sharing; bankruptcy; relationship banking;

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References

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  4. Padilla, A.J. & Pagano, M., 1994. "Endogenous Communication Among Lenders and Entrepreneurial Incentives," Papers, Centro de Estudios Monetarios Y Financieros- 9407, Centro de Estudios Monetarios Y Financieros-.
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  8. Philippe Aghion, Patrick Bolton & Steven Fries, 1999. "Optimal Design of Bank Bailouts: The Case of Transition Economies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 155(1), pages 51-, March.
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  10. Schnitzer, Monika, 2003. "Privatisierung in Osteuropa: Strategien und Ergebnisse," Munich Reprints in Economics, University of Munich, Department of Economics 19884, University of Munich, Department of Economics.
  11. Mitchell, Janet, 2001. "Bad Debts and the Cleaning of Banks' Balance Sheets: An Application to Transition Economies," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 10(1), pages 1-27, January.
  12. Claessens, Stijn & Klapper, Leora F., 2002. "Bankruptcy around the World: Explanations of its Relative Use," CEI Working Paper Series, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University 2002-17, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
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Cited by:
  1. Zakolyukina Anastasia, 2006. "Bankrtuptcy in Russia: External Management Performance," EERC Working Paper Series, EERC Research Network, Russia and CIS 06-09e, EERC Research Network, Russia and CIS.

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