Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/19811
Authors: 
Hainz, Christa
Year of Publication: 
2005
Series/Report no.: 
Proceedings of the German Development Economics Conference, Kiel 2005 / Verein für Socialpolitik, Research Committee Development Economics 18
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
institutions
bank competition
information sharing
bankruptcy
relationship banking
JEL: 
G33
K10
G21
D82
Document Type: 
Conference Paper

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