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Credit and efficiency in centralized and decentralized economies

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  • Mathias Dewatripont
  • Eric Maskin

Abstract

We study a credit model where, because of adverse selection, unprofitable projects may nevertheless be financed. Indeed they may continue to be financed even when shown to be low-quality if sunk costs have already been incurred. We show that credit decentralization offers a way for creditors to commit not to refinance such projects, thereby discouraging entrepreneurs from undertaking them initially. Thus, decentralization provides financial discipline. Nevertheless, we argue that it puts too high a premium on short-term returns. The model seems pertinent to two issues: Soft budget constraint problems in centralized economies, and differences between Anglo-Saxon and German-Japanese” financing. © 1995 The Review of Economic Studies Limited.

Suggested Citation

  • Mathias Dewatripont & Eric Maskin, 1995. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9603, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:ulb:ulbeco:2013/9603 Note: SCOPUS: ar.j
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