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Moral Hazards, Bankruptcy Costs, and International Financial Capital Mobility

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  • Sanjay Banerji
  • Ngo Van Long

Abstract

Using a model with moral hazard and bankruptcy costs, we show that the direction of intertemporal trade between countries depends on differences in their autarkic distributions of wealth. We also examine the consequences of redistribution policies and bail‐out policies in this framework. We show that, in the presence of bankruptcy cost and capital market imperfections due to moral hazard, the very rich and the very poor do not undertake any risk and choose to be passive lenders. Only individuals whose wealth lies within an intermediate range choose to become entrepreneurs. Redistributive policies influence the supply of entrepreneurship and autarkic interest rates.

Suggested Citation

  • Sanjay Banerji & Ngo Van Long, 2007. "Moral Hazards, Bankruptcy Costs, and International Financial Capital Mobility," Review of Development Economics, Wiley Blackwell, vol. 11(2), pages 369-384, May.
    • Handle: RePEc:bla:rdevec:v:11:y:2007:i:2:p:369-384
    DOI: 10.1111/j.1467-9361.2007.00404.x
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    Cited by:

    1. Chong Kyoon Lee & Johan Wiklund & Alejandro Amezcua & Tae Jun Bae & Almantas Palubinskas, 2022. "Business failure and institutions in entrepreneurship: a systematic review and research agenda," Small Business Economics, Springer, vol. 58(4), pages 1997-2023, April.
    2. Sorana Vătavu & Marilen Pirtea & Sorin Vătavu, 2011. "A Review of Financial Regulations to Avoid the Nationalisation of Losses in the Banking System," Annals of the University of Petrosani, Economics, University of Petrosani, Romania, vol. 11(1), pages 277-288.

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