Search

A model of reform in the European Union reveals that the threat of forming a club-in-the-club can be a powerful instrument to force weak members to work harder for common goals. Qualified majority voting takes away the veto power of weaker members.

Analysis of soft budget constraint models of firms financed by banks in transition economies reveals that all models share the same sequential structure due to endogenous lack of credibility in liquidating a project instead of refinancing it. The study also reveals that they also share the property that refinancing is optimal ex post for the decision maker that hard budget constraint mechanism requires endogenous restoration of credibility for liquidation.

This paper provides a framework for understanding the lingering problem of soft budget constraints in many transition economies even after the macroeconomic situation has been stabilized and a sound banking system has been introduced. We show that soft budget constraints can persist and even coexist with credit crunches, as the existing evidence from transition economies seems to indicate. As in Dewatripont and Maskin (Credit and efficiency in centralized and decentralized economies, Review of Economic Studies, 1995), the existence of sunk costs in existing loans may also give rise to soft budget constraints when banks themselves are subject to hard budget constraints and have outside options. We endogenize the outside option by allowing banks to allocate available funds between new lending and refinancing of old loans. The option to invest in new lending hardens budget constraints when the average quality of investment projects is high and varied. Otherwise soft budget constraints may persist. In the latter case, refinancing of old loans crowds out new finance, giving rise to credit crunches on new loans. By screening and monitoring firms banks can improve the relative profitability of new lending and break out of soft budget constraint equilibria. Unlike Dewatripont and Maskin, larger banks may be harder than smaller banks because they have the resources and higher incentives to invest in screening and monitoring. Keywords: Soft budget constraints; Banking reform; Credit crunch; Financial transition; Creditor passivity

We study the problem of financial contracting and renegotiation between a firm and outside investors when the firm cannot commit to future payouts, but assets can be contracted upon. We show that a capital structure with multiple investors specializing in short-term and long-term claims is superior to a structure with only one type of claim, because this hardens the incentives for the entrepreneur to renegotiate the contract ex post. Depending on the parameters, the optimal capital structure also differentiates between state-independent and state-dependent long-term claims, which can be interpreted as long-term debt and equity., I. INTRODUCTION Most firms have more than one investor and issue more than one type of financial claim. These claims differ, among other things, in maturity, payout contingencies, security interests, [...]

The Japanese keiretsu system is governed through a reciprocal allocation of control rights among managers. This system involves shareholdings of both equity and debt for all managers which results in a system in which managers regulate each other's actions or else face the threat of being removed from power. However, the keiretsu comes under heirarchical monitoring subject to the control of the main bank when the company is faced with a financial crisis.