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Soft budget constraints in a dynamic general equilibrium model


  • Enrique Gilles


This paper considers an overlapping generations model in which capitalinvestment is financed in a credit market with adverse selection. Lenders´inability to commit ex-ante not to bailout ex-post, together with a wealthyposition of entrepreneurs gives rise to the soft budget constraint syndrome,i.e. the absence of liquidation of poor performing firms on a regular basis.This problem arises endogenously as a result of the interaction betweenthe economic behavior of agents, without relying on political economy ex-planations. We found the problem more binding along the business cycle,providing an explanation to creditors leniency during booms in some Latin-American countries in the late seventies and early nineties.

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  • Enrique Gilles, 2010. "Soft budget constraints in a dynamic general equilibrium model," Documentos de Trabajo 006885, Universidad del Rosario.
  • Handle: RePEc:col:000092:006885

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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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