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Reputation and the Soft-Budget Constraint

Author

Listed:
  • Alexei Deviatov

    (New Economic School)

  • Barry W. Ickes

    (Pennsylvania State University)

Abstract

We study the role of reputation in dealing with the soft-budget constraint. We examine whether the reputation of a borrower can lead to repayment in an environment where enforcement is weak. We also introduce lenders’ reputation and examine how this impacts on the allocation of borrowers. We find that reputation can harden budget constraint and improve welfare, although it can never fully eliminate softness. We also show that lenders who acquire a reputation for being tough can earn higher profits than lenders with reputations for being soft.

Suggested Citation

  • Alexei Deviatov & Barry W. Ickes, 2005. "Reputation and the Soft-Budget Constraint," Working Papers w0078, New Economic School (NES).
    • Handle: RePEc:abo:neswpt:w0078
    as

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    File URL: https://www.nes.ru/files/Preprints-resh/WP78Deviatov.pdf
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    References listed on IDEAS

    as
    1. Steven Tadelis, 1999. "What's in a Name? Reputation as a Tradeable Asset," American Economic Review, American Economic Association, vol. 89(3), pages 548-563, June.
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    8. M. Dewatripont & E. Maskin, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(4), pages 541-555.
    9. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-862, August.
    10. Janet Mitchell, 2000. "Theories of Soft Budget Constraints and the Analysis of Banking Crises," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(1), pages 59-100, March.
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    More about this item

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • P34 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Finance

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