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 gets a payoff if a firm is liquidated. Second, it loses the rent from incumbent customers 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. However, in a particular range, improving institutions may even decrease the number of bad firms liquidated.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Munich Discussion Paper ; No. 2004-18

Classification and Topics

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

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hainz, Christa
• Event: Veröffentlichung
• (who): Ludwig-Maximilians-Universität München, Volkswirtschaftliche Fakultät
• (where): München
• (when): 2004

Further information

• DOI: doi:10.5282/ubm/epub.388
• Handle: http://hdl.handle.net/10419/104137
• URN: urn:nbn:de:bvb:19-epub-388-5
• Last update: 10.03.2025, 11:44 AM CET