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Reputation and the Soft-Budget Constraint

Author

Listed:
  • Alexei Deviatov

    () (New Economic School)

  • Barry W. Ickes

    () (Pennsylvania State University)

Abstract

We study the role of reputation in dealing with the soft-budget constraint. We examine whether the reputation of a borrower can lead to repayment in an environment where enforcement is weak. We also introduce lenders’ reputation and examine how this impacts on the allocation of borrowers. We find that reputation can harden budget constraint and improve welfare, although it can never fully eliminate softness. We also show that lenders who acquire a reputation for being tough can earn higher profits than lenders with reputations for being soft.

Suggested Citation

  • Alexei Deviatov & Barry W. Ickes, 2005. "Reputation and the Soft-Budget Constraint," Working Papers w0078, Center for Economic and Financial Research (CEFIR).
  • Handle: RePEc:cfr:cefirw:w0078
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    File URL: http://www.cefir.ru/papers/WP78Deviatov.pdf
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    References listed on IDEAS

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    1. Yingyi Qian & Chenggang Xu, 1998. "Innovation and Bureaucracy Under Soft and Hard Budget Constraints," Review of Economic Studies, Oxford University Press, vol. 65(1), pages 151-164.
    2. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.
    3. Steven Tadelis, 1999. "What's in a Name? Reputation as a Tradeable Asset," American Economic Review, American Economic Association, vol. 89(3), pages 548-563, June.
    4. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-862, August.
    5. Janet Mitchell, 2000. "Theories of Soft Budget Constraints and the Analysis of Banking Crises," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(1), pages 59-100, March.
    6. Cole, Harold L & Kehoe, Patrick J, 1998. "Models of Sovereign Debt: Partial versus General Reputations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 55-70, February.
    7. Berglof, Erik & Roland, Gerard, 1998. "Soft Budget Constraints and Banking in Transition Economies," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 18-40, March.
    8. Alexeev, Michael & Kim, Sunghwan, 2004. "Lenders' reputation and the soft budget constraint," Economics Letters, Elsevier, vol. 84(1), pages 69-73, July.
    9. M. Dewatripont & E. Maskin, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 541-555.
    10. Kornai, Janos, 1998. "The Concept of the Soft Budget Constraint Syndrome in Economic Theory," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 11-17, March.
    11. Bulow, Jeremy & Rogoff, Kenneth, 1989. "Sovereign Debt: Is to Forgive to Forget?," American Economic Review, American Economic Association, vol. 79(1), pages 43-50, March.
    12. Mathias Dewatripont & Eric Maskin & Gérard Roland, 1999. "Soft budget constraints and transition," ULB Institutional Repository 2013/9663, ULB -- Universite Libre de Bruxelles.
    13. Eric Maskin & Chenggang Xu, 2001. "Soft budget constraint theories: From centralization to the market," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 9(1), pages 1-27, March.
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    More about this item

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance

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