Lenders' reputation and the soft budget constraint

Michael Alexeev; Sunghwan Kim

doi:10.1016/j.econlet.2004.01.003

Lenders' reputation and the soft budget constraint

Michael Alexeev
, Sunghwan Kim

School of Business Administration

Indiana University Bloomington

Research output: Contribution to journal › Article › peer-review

1 Scopus citations

Abstract

Suppose at t =0 lenders can choose whether to be "tough" or "soft," and some borrowers learn the lenders' type (reputation). In a decentralized lending market, being tough is optimal for a wider range of parameters than under centralization, because a soft lender who refinances poor projects is hurt by the tough lenders' presence, as the quality of the lenders' project pool is affected by the other lenders' reputation.

Original language	English
Pages (from-to)	69-73
Number of pages	5
Journal	Economics Letters
Volume	84
Issue number	1
DOIs	https://doi.org/10.1016/j.econlet.2004.01.003
State	Published - Jul 2004

Keywords

Centralization
Decentralization
Reputation
Soft budget constraint

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10.1016/j.econlet.2004.01.003

Cite this

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AB - Suppose at t =0 lenders can choose whether to be "tough" or "soft," and some borrowers learn the lenders' type (reputation). In a decentralized lending market, being tough is optimal for a wider range of parameters than under centralization, because a soft lender who refinances poor projects is hurt by the tough lenders' presence, as the quality of the lenders' project pool is affected by the other lenders' reputation.

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KW - Decentralization

KW - Reputation

KW - Soft budget constraint

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Lenders' reputation and the soft budget constraint

Abstract

Keywords

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