Financial Sector Inefficiencies and Coordinate Failures: Implications for Crisis Management

24 Pages Posted: 14 Mar 2000 Last revised: 10 Apr 2001

See all articles by Pierre-Richard Agenor

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Joshua Aizenman

National Bureau of Economic Research (NBER)

Date Written: December 1999

Abstract

This paper analyzes the implication of inefficient financial intermediation for crisis management in a country where firms are highly-indebted. The analysis is based on a model in which firms rely on bank credit to finance their working capital needs and lenders face high state verification and enforcement costs of loan contracts. The analysis shows that higher contract enforcement and verification costs, lower expected productivity, or higher volatility, may shift the economy to the wrong side of the debt Laffer curve, with potentially sizable employment and output losses. The main implication of this analysis for the current policy debate on crisis management is East Asia is that dept reduction, in addition to debt rescheduling, may be required as part of the process of reducing financial sector inefficiencies.

Suggested Citation

Agenor, Pierre-Richard and Aizenman, Joshua, Financial Sector Inefficiencies and Coordinate Failures: Implications for Crisis Management (December 1999). NBER Working Paper No. w7446. Available at SSRN: https://ssrn.com/abstract=214611

Pierre-Richard Agenor

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

Joshua Aizenman (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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