Soft budget constraints in a dynamic general equilibrium model

Enrique Gilles

No 6885, Documentos de Trabajo from Universidad del Rosario

Abstract: This paper considers an overlapping generations model in which capitalinvestment is financed in a credit market with adverse selection. Lenders´inability to commit ex-ante not to bailout ex-post, together with a wealthyposition of entrepreneurs gives rise to the soft budget constraint syndrome,i.e. the absence of liquidation of poor performing firms on a regular basis.This problem arises endogenously as a result of the interaction betweenthe economic behavior of agents, without relying on political economy ex-planations. We found the problem more binding along the business cycle,providing an explanation to creditors leniency during booms in some Latin-American countries in the late seventies and early nineties.

JEL-codes: D21 D82 E22 E44 (search for similar items in EconPapers)
Pages: 35
Date: 2010-02-28
New Economics Papers: this item is included in nep-cta, nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:col:000092:006885

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