Banking Systems, Bankruptcy Arrangements and Institutional Complementarity
Posted: 24 Aug 1998
Banking systems and bankruptcy codes define the legal environment in which financial contracts are concluded by, respectively, restricting financial intermediaries to certain contracts and defining reorganization proceedings. The theoretical link between these two institutions are thus financial contracting and financial distress. By defining institutional complementarity in terms of the subgame perfection of a sequential game induced by a given set of institutions, the interplay of banking and bankruptcy arrangements is studied for two polar cases: the US and Germany. It is found that both sets of institutions are complementary and correspond to different subgame perfect equilibria. Moreover, incentive and commitment issues arising in financial contracting are discussed and institutional evolution arising from the need of complementarity are related to banking and bankruptcy reform.
JEL Classification: G21, G33, G34, K22
Suggested Citation: Suggested Citation