Review of Economic Studies Vol. 62 No. 4 1995
Credit and Efficiency in Centralized and Decentralized Economies
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.
- DOI
- 10.2307/2298076
- Volume
- 62
- Issue
- 4
- Pages
- 541-555
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref