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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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    References listed on IDEAS

    1. Daron Acemoglu, 2002. "Directed Technical Change," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 781-809.
    2. Bental, Benjamin & Demougin, Dominique, 2008. "Do factor shares reflect technology?," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 1329-1334, September.
    3. Robert Chirinko & Steven M. Fazzari & Andrew P. Meyer, 2002. "That Elusive Elasticity: A Long-panel Approach to Estimating the Price Sensitivity of Business Capital," Emory Economics 0202, Department of Economics, Emory University (Atlanta).
    4. Hernando Zuleta, 2008. "An empirical note on factor shares," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 17(3), pages 379-390.
    5. David Popp, 2002. "Induced Innovation and Energy Prices," American Economic Review, American Economic Association, vol. 92(1), pages 160-180, March.
    6. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 1-54.
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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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