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Quality of Institutions, Credit Markets and Bankruptcy

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  • Christa Hainz

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.

Suggested Citation

  • Christa Hainz, 2005. "Quality of Institutions, Credit Markets and Bankruptcy," William Davidson Institute Working Papers Series wp745, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:2005-745
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    References listed on IDEAS

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    Cited by:

    1. Kolecek, Ludek, 2008. "Bankruptcy laws and debt renegotiation," Journal of Financial Stability, Elsevier, vol. 4(1), pages 40-61, April.
    2. Zakolyukina Anastasia, 2006. "Bankrtuptcy in Russia: External Management Performance," EERC Working Paper Series 06-09e, EERC Research Network, Russia and CIS.

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    More about this item

    Keywords

    Credit markets; institutions; bank competition; information sharing; bankruptcy; relationship banking.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K10 - Law and Economics - - Basic Areas of Law - - - General (Constitutional Law)

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