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Looting: The Economic Underworld of Bankruptcy for Profit


George A. Akerlof


University of California, Berkeley; National Bureau of Economic Research (NBER)

Paul M. Romer


National Bureau of Economic Research (NBER)

April 1994

NBER Working Paper No. R1869

Abstract:     
During the 1980s, a number of unusual financial crises occurred. In Chile, for example, the financial sector collapsed, leaving the government with responsibility for extensive foreign debts. In the United States, large numbers of government-insured savings and loans became insolvent - and the government picked up the tab. In Dallas, Texas, real estate prices and construction continued to boom even after vacancies had skyrocketed, and the suffered a dramatic collapse. Also in the United States, the junk bond market, which fueled the takeover wave, had a similar boom and bust.

In this paper, we use simple theory and direct evidence to highlight a common thread that runs through these four episodes. The theory suggests that this common thread may be relevant to other cases in which countries took on excessive foreign debt, governments had to bail out insolvent financial institutions, real estate prices increased dramatically and then fell, or new financial markets experienced a boom and bust. We describe the evidence, however, only for the cases of financial crisis in Chile, the thrift crisis in the United States, Dallas real estate and thrifts, and junk bonds.

Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

Number of Pages in PDF File: 64

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Date posted: June 9, 2004  

Suggested Citation

Akerlof, George A. and Romer, Paul M., Looting: The Economic Underworld of Bankruptcy for Profit (April 1994). NBER Working Paper No. R1869. Available at SSRN: http://ssrn.com/abstract=227162

Contact Information

George A. Akerlof (Contact Author)
University of California, Berkeley ( email )
Department of Economics 549 Evans Hall #3880
Berkeley, CA 94720
United States
510-642-0822 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Paul M. Romer
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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