Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/104137
Authors: 
Hainz, Christa
Year of Publication: 
2004
Series/Report no.: 
Munich Discussion Paper 2004-18
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 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.
Subjects: 
Credit markets
institutions
bank competition
information sharing
bankruptcy
relationship banking
JEL: 
G21
G33
K10
D82
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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