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Emerging Market Lending: Is Moral Hazard Endogenous?


  • Broer, Tobias

    (Bank of England)


This paper looks at the effect of moral hazard, resulting from information asymmetries in financial markets, on growth in financially open developing countries. We show 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

  • Broer, Tobias, 2002. "Emerging Market Lending: Is Moral Hazard Endogenous?," Royal Economic Society Annual Conference 2002 35, Royal Economic Society.
  • Handle: RePEc:ecj:ac2002:35

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    References listed on IDEAS

    1. Galor, Oded & Ryder, Harl E., 1989. "Existence, uniqueness, and stability of equilibrium in an overlapping-generations model with productive capital," Journal of Economic Theory, Elsevier, vol. 49(2), pages 360-375, December.
    2. Boyd, John H. & Smith, Bruce D., 1992. "Intermediation and the equilibrium allocation of investment capital : Implications for economic development," Journal of Monetary Economics, Elsevier, vol. 30(3), pages 409-432, December.
    3. 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.
    4. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    5. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    6. Ma, Chien-Hui & Smith, Bruce D., 1996. "Credit market imperfections and economic development: Theory and evidence," Journal of Development Economics, Elsevier, vol. 48(2), pages 351-387, March.
    7. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-255, January.
    8. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 647-663.
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    Cited by:

    1. 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.
    2. 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.
    3. 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.

    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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