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Title:Quality of institutions, credit markets and bankruptcy PDF Logo
Authors:Hainz, Christa
Issue Date:2004
Series/Report no.:CESifo working papers 1362
Abstract: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.
Subjects:credit markets
bank competition
information sharing
relationship banking
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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