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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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  1. Jappelli, Tullio & Pagano, Marco, 1991. "Information Sharing in Credit Markets," CEPR Discussion Papers 579, C.E.P.R. Discussion Papers.
  2. Tullio Jappelli & Marco Pagano, 2000. "Information Sharing in Credit Markets: A Survey," CSEF Working Papers 36, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Bianco, Magda & Jappelli, Tullio & Pagano, Marco, 2002. "Courts and Banks: Effects of Judicial Enforcement on Credit Markets," CEPR Discussion Papers 3347, C.E.P.R. Discussion Papers.
  4. Mitchell, Janet, 2001. "Bad Debts and the Cleaning of Banks' Balance Sheets: An Application to Transition Economies," Journal of Financial Intermediation, Elsevier, vol. 10(1), pages 1-27, January.
  5. Erik BERGLÖF & Gérard ROLAND & Ernst-Ludwig VON THADDEN, 2000. "An Incomplete Contracts Approach to Corporate Bankruptcy," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 00.12, Université de Lausanne, Faculté des HEC, DEEP, revised Apr 2002.
  6. 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, vol. 155(1), pages 51-, March.
  7. Bouckaert, Jan & Degryse, Hans, 2006. "Entry and strategic information display in credit markets," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/99053, Katholieke Universiteit Leuven.
  8. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
  9. Jappelli, Tullio & Pagano, Marco, 1999. "Information Sharing, Lending and Defaults: Cross-Country Evidence," CEPR Discussion Papers 2184, C.E.P.R. Discussion Papers.
  10. Claessens, Stijn & Klapper, Leora F., 2002. "Bankruptcy around the world - explanations of its relative use," Policy Research Working Paper Series 2865, The World Bank.
  11. Schnitzer, Monika, 1998. "On the Role of Bank Competition for Corporate Finance and Corporate Control in Transition Economies," CEPR Discussion Papers 2013, C.E.P.R. Discussion Papers.
  12. Perotti, Enrico C., 1993. "Bank lending in transition economies," Journal of Banking & Finance, Elsevier, vol. 17(5), pages 1021-1032, September.
  13. Monika Schnitzer, 2003. "Privatisierung in Osteuropa: Strategien und Ergebnisse," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 4(3), pages 359-378, 08.
  14. Giovanni Dell'Ariccia & Ezra Friedman & Robert Marquez, 1999. "Adverse Selection as a Barrier to Entry in the Banking Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 515-534, Autumn.
  15. Padilla, A Jorge & Pagano, Marco, 1997. "Endogenous Communication among Lenders and Entrepreneurial Incentives," Review of Financial Studies, Society for Financial Studies, vol. 10(1), pages 205-36.
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Cited by:
  1. Kolecek, Ludek, 2008. "Bankruptcy laws and debt renegotiation," Journal of Financial Stability, Elsevier, vol. 4(1), pages 40-61, April.
  2. Zakolyukina Anastasia, 2006. "Bankrtuptcy in Russia: External Management Performance," EERC Working Paper Series 06-09e, EERC Research Network, Russia and CIS.

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