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Collusion and Commitment in Bank Bailout

Author

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  • Yanhua ZHANG

    (GREMAQ, University of Toulouse)

Abstract

Collusion and soft budget constraint are two conspicuous phenomena in transition economies¡¯ banking system. Literature has separately investigated those two phenomena from theoretical point of views. However, the cross-point of both phenomena has been neglected in the research of banking regulation. The present paper addresses this issue in a simple model of two-period contract with termination at the end of the first period. By comparing the two hierarchies -- ¡°bank-firm¡± and ¡°government-bank-firm¡±, we show that the government¡¯s non-commitment and banking bailout cause inefficiency in the contact relationship. Moreover, after introducing collusion possibility, non-commitment of the government increases the stakes, or bribes, which the collusive bank can extract, and makes it more costly for the government to implement this contract. However, taking into account the fact that the bank is collusive, the government who aims to prevent collusion will switch to the other equilibrium where she sticks to her commitment and excludes collusion from the contract relationship. Here, collusion plays a role as a hardening budget constraint device. Some policy implications are suggested at the end.

Suggested Citation

  • Yanhua ZHANG, 2005. "Collusion and Commitment in Bank Bailout," Industrial Organization 0509011, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpio:0509011
    Note: Type of Document - pdf; pages: 38
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/io/papers/0509/0509011.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    soft budget constraint; collusion; moral hazard; commitment; transition; centralized economy.;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

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