Quality of Institutions, Credit Markets and Bankruptcy

Christa Hainz

Discussion Papers in Economics from University of Munich, Department of Economics

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.

Keywords: Credit markets; institutions; bank competition; information sharing; bankruptcy; relationship banking (search for similar items in EconPapers)
JEL-codes: D82 G21 G33 K10 (search for similar items in EconPapers)
Date: 2004-07
New Economics Papers: this item is included in nep-fin and nep-law
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Quality of Institutions, Credit Markets and Bankruptcy (2005)
Working Paper: Quality of Institutions, Credit Markets and Bankruptcy (2005)
Working Paper: Quality of Institutions, Credit Markets and Bankruptcy (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenec:388

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