Credit and Efficiency in Centralized and Decentralized Economies
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ID: 296946
1995
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Abstract
We study a credit model where, because of adverse selection, unprofitable projects may nevertheless be financed. Indeed they may continue to be financed even when shown to be low-quality if sunk costs have already been incurred. We show that credit decentralization offers a way for creditors to commit not to refinance such projects, thereby discouraging entrepreneurs from undertaking them initially. Thus, decentralization provides financial discipline. Nevertheless, we argue that it puts too high a premium on short-term returns. The model seems pertinent to two issues: “soft budget constraint” problems in centralized economies, and differences between “Anglo-Saxon” and “German-Japanese” financing practices.
| Reference Key |
openalex_W2095370591
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|---|---|
| Authors | M. Dewatripont, Eric Maskin |
| Journal | The Review of Economic Studies |
| Year | 1995 |
| DOI |
10.2307/2298076
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| URL | |
| Keywords | Keywords not found |
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