Dynamic Liquidation - with an Application to Japan

20 Pages Posted: 16 Mar 2002

See all articles by Thomas Harr

Thomas Harr

University of Copenhagen - Department of Economics

Martin Junker Nielsen

University of Copenhagen - Department of Economics

Abstract

We consider the optimal dynamic liquidation of banks' bad loans. The banks' liquidation strategy affects the value of collateral and hence other firms' access to credit. In this framework, we characterize the socially optimal liquidation path. We show that the 'liquidate immediately' strategy is optimal in a small banking crisis whereas the 'liquidate gradually' strategy is optimal in a large banking crisis. We argue that liquidation is likely to be postponed at society's cost when the regulator is uncertain of re-appointment.

Keywords: Dynamic, Liquidation, Japan

JEL Classification: G21, G33, G38

Suggested Citation

Harr, Thomas and Nielsen, Martin Junker, Dynamic Liquidation - with an Application to Japan. Available at SSRN: https://ssrn.com/abstract=302324 or http://dx.doi.org/10.2139/ssrn.302324

Thomas Harr (Contact Author)

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark
(+) 45 35323258 (Phone)
(+) 45 35323000 (Fax)

Martin Junker Nielsen

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

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