Institutions and Soft Budget Constraints
International Review of Accounting, Banking and Finance, 2011 Summer, vol. 3(2): 41-66
26 Pages Posted: 6 Jun 2012 Last revised: 2 Jul 2012
Date Written: June 6, 2011
This paper presents a model of soft budget constraints (SBC) in a bank lending relationship, emphasizing the role of institutions in shaping the SBC phenomena. The model allows two types of SBC to emerge according to specific constellations of parameters: the SBC as a dynamic commitment problem and the SBC as an external assistance problem. The paper sheds light on issues such as the political intervention in private contracts, the design of bankruptcy procedures, the cross-subsidization among social groups through the credit system, and the privately-owned versus State-owned bank dichotomy.
Keywords: Institutions, Soft Budget Constraints, Bank Lending, State-owned Banks, Bankruptcy Procedures
JEL Classification: D21, D23, D72, G21, G33, L14
Suggested Citation: Suggested Citation