Financial sector inefficiencies and coordination failures : implications for crisis management
The authors analyze the implications for crisis management of inefficient financial intermediation in a country (such as Indonesia or the Republic of Korea) where firms are highly indebted. They base their analysis on a model in which firms rely on bank credit to finance their working capital needs and loan contracts entail high state verification and enforcement costs for lenders. They find that higher volatility of output, lower productivity, or higher costs for contract enforcement and verification may shift the economy to the inefficient portion of the debt Laffer curve - with potentially sizable losses in employment and output. What implications does this have for the policy debate on crisis management in East Asia? Debt reduction, in addition to debt rescheduling, may be required to reduce employment and output losses in the presence of inefficiencies in the financial sector. In practice this may be difficult to coordinate among a large group of creditors because of the free-riding problem: Each creditor has an incentive to refrain from offering debt relief on its own claims and wait for others to do so, thereby raising the expected value of its own claims.
|Date of creation:||30 Sep 1999|
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References listed on IDEAS
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- Elhanan Helpman, 1989.
"Voluntary Debt Reduction: Incentives and Welfare,"
IMF Staff Papers,
Palgrave Macmillan, vol. 36(3), pages 580-611, September.
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- Elhanan Helpman, 1988. "The Simple Analytics of Debt-Equity Swaps," NBER Working Papers 2771, National Bureau of Economic Research, Inc.
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- Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90. Full references (including those not matched with items on IDEAS)