Quality of institutions, credit markets and bankruptcy

Arbeitspapier

The number of firm bankruptcies is surprisingly low in economies with poor institutions. We study a model of bank-firm relationship and show that the bank's decision to liquidate bad firms has two opposing effects. First, the bank receives a payoff if a firm is liquidated. Second, it loses the rent from incumbent customers that is due to its informational advantage. We show that institutions must improve significantly in order to yield a stable equilibrium in which the optimal number of firms is liquidated. There is also a range where improving institutions may decrease the number of bad firms liquidated.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 1362

Classification and Topics

• Classification: Wirtschaft ; Basic Areas of Law: General (Constitutional Law) ; Bankruptcy; Liquidation ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Asymmetric and Private Information; Mechanism Design
• Subject: credit markets ; institutions ; bank competition ; information sharing ; bankruptcy ; relationship banking ; Konkurs ; Liquidation ; Bankgeschäft ; Firmenkundengeschäft ; Asymmetrische Information ; Institutionelle Infrastruktur

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hainz, Christa
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2004

Further information

• Handle: http://hdl.handle.net/10419/18725