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Credit Termination and the Technology Bubbles

  • Jin, Yu
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We study the role of firms' credit histories in a business cycle model. Loans are dynamic contracts between banks and firms, and credit terminations are used as an incentive device. Banks deny future loans to an entrepreneur according to his credit histories in order to affect his choice of project ex ante. This will generate fluctuations from technology shocks to the riskiness of different types of projects as occurred during the technology bubbles. The model is used to explain the boom-and-bust of the dot-com bubble, one leading example of technology bubbles in the economy, in the late 1990s.

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File URL: https://mpra.ub.uni-muenchen.de/29010/2/MPRA_paper_29010.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 29010.

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Date of creation: Nov 2010
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Handle: RePEc:pra:mprapa:29010
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  1. Stiglitz, Joseph E & Weiss, Andrew, 1983. "Incentive Effects of Terminations: Applications to the Credit and Labor Markets," American Economic Review, American Economic Association, vol. 73(5), pages 912-27, December.
  2. Andrei Shleifer & Robert W. Vishny, 1995. "The Limits of Arbitrage," NBER Working Papers 5167, National Bureau of Economic Research, Inc.
  3. Spear, Stephen E. & Wang, Cheng, 2005. "When to fire a CEO: optimal termination in dynamic contracts," Journal of Economic Theory, Elsevier, vol. 120(2), pages 239-256, February.
  4. 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.
  5. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
  6. Dilip Abreu & Markus K. Brunnermeier, 2002. "Bubbles and crashes," LSE Research Online Documents on Economics 24905, London School of Economics and Political Science, LSE Library.
  7. Cheng Wang & Anthony Smith, . "Dynamic Credit Relationships in General Equilibrium," GSIA Working Papers 2000-27, Carnegie Mellon University, Tepper School of Business.
  8. Owen A. Lamont & Richard H. Thaler, . "Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs," CRSP working papers 528, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  9. Stephen E. Spear & Sanjay Srivastava, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Oxford University Press, vol. 54(4), pages 599-617.
  10. Eli Ofek & Matthew Richardson, 2003. "DotCom Mania: The Rise and Fall of Internet Stock Prices," Journal of Finance, American Finance Association, vol. 58(3), pages 1113-1138, 06.
  11. David, Paul A, 1990. "The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox," American Economic Review, American Economic Association, vol. 80(2), pages 355-61, May.
  12. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
  13. Thomas Noe & Geoffrey Parker, 2005. "Winner Take All: Competition, Strategy, and the Structure of Returns in the Internet Economy," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 141-164, 03.
  14. Mark Gertler, 1992. "Financial Capacity and Output Fluctuations in an Economy with Multi-Period Financial Relationships," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 455-472.
  15. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
  16. Williamson, Stephen D, 1987. "Financial Intermediation, Business Failures, and Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1196-1216, December.
  17. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
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