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Emerging Market Lending: Is Moral Hazard Endogenous?

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  • Tobias Broer

Abstract

This paper presents a simple model to analyse how moral hazard resulting from information asymmetries in financial markets affects growth in financially open developing countries. We find that if domestic entrepreneurs can gamble with foreign creditors’ money, borrowing under standard debt contracts is constrained by a No-Gambling Condition similar to that of Hellmann, Murdock, and Stiglitz (2000). However, this incentive constraint is endogenous in the development process: growth increases entrepreneurs’ own capital at risk, thus reducing gambling incentives, but it decreases profitability of capital investment, which has the opposite effect. General equilibrium under moral hazard shows a unique and stable steady state, but involves at least temporary rationing of profitable projects and possibly capital flight from developing countries.

Suggested Citation

  • Tobias Broer, 2004. "Emerging Market Lending: Is Moral Hazard Endogenous?," Working Papers Central Bank of Chile 273, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:273
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    2. Tobias Broer, 2007. "Emerging Market Lending: Is Moral Hazard Endogenous?," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 32(2), pages 41-67, December.
    3. Rungrudee Suetorsak, 2006. "Banking crisis in east asia: A micro/macro perspective," Review of Quantitative Finance and Accounting, Springer, vol. 26(3), pages 219-248, May.
    4. Stefan D. Josten, 2013. "Middle-Class Consensus, Social Capital And The Fundamental Causes Of Economic Growth And Development," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(1), pages 1-26, March.

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    More about this item

    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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