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Quality of Institutions, Credit Markets and Bankruptcy

Christa Hainz

No wp745, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

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.

Keywords: Credit markets; institutions; bank competition; information sharing; bankruptcy; relationship banking. (search for similar items in EconPapers)
JEL-codes: G21 G33 K10 (search for similar items in EconPapers)
Pages: pages
Date: 2005-02-01
New Economics Papers: this item is included in nep-bec, nep-cwa, nep-ent, nep-fin, nep-law and nep-tra
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Working Paper: Quality of Institutions, Credit Markets and Bankruptcy (2005) Downloads
Working Paper: Quality of Institutions, Credit Markets and Bankruptcy (2004) Downloads
Working Paper: Quality of Institutions, Credit Markets and Bankruptcy (2004) Downloads
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