Financial Sector Inefficiencies and the Debt Laffer Curve

The authors analyze the implications of inefficient financial intermediation for dbt management, using a model in which firms rely on bank credit to finance their working capital needs, and, lenders face a high state verification and enforcement costs of loan contracts. Their analysis shows that lower expected productivity, higher contract enforcement, and verification costs, or higher volatility of productivity shocks may shift the economy to the wrong side of the debt Laffer curve, with potentially sizable output, and welfare losses. The main implication of this analysis is that debt relief may generate little welfare gains, unless is accompanied by reforms aimed at reducing financial sector inefficiencies.

Bibliographic Details

Main Authors:	Agénor, Pierre-Richard, Aizenman, Joshua
Language:	English en_US
Published:	World Bank, Washington, D.C. 2002-05
Subjects:	FINANCIAL INTERMEDIATION, DEBT MANAGEMENT, BANK CREDIT, COST OF CAPITAL, LOAN COLLATERAL, CONTRACT ENFORCEMENT, VERIFICATION MEASURES, PRODUCTIVITY, ECONOMYWIDE SCHEMES, LAFFER CURVE, OUTPUTS, WELFARE ECONOMICS, DEBT RELIEF, REFORM POLICY ACCOUNTING, ASYMMETRIC INFORMATION, BANK LENDING, BANK LOANS, BANKING SECTOR, BANKRUPTCY, BANKRUPTCY PROCEDURES, BORROWING, CAPITAL MARKETS, COAL, CONTAGION, CREDIT MARKETS, CREDITOR, CREDITORS, DEBT, DEBT OBLIGATIONS, DEBT OVERHANG, DEBT REDUCTION, DEBT REPAYMENT, DEBT SERVICE, DEBTORS, DEFAULT RISK, DEFAULTS, DEVELOPMENT ECONOMICS, DISCOUNT RATE, ECONOMETRIC ANALYSIS, ECONOMIC ACTIVITY, ECONOMIC EFFICIENCY, ECONOMIC RESEARCH, ECONOMIC THEORY, ECONOMISTS, EMPLOYMENT, EQUILIBRIUM, EXCHANGE RATE, EXPECTED VALUE, EXTERNAL DEBT, EXTERNALITIES, FACE VALUE, FINANCIAL CRISES, FINANCIAL CRISIS, FINANCIAL INTERMEDIARIES, FINANCIAL MARKETS, FINANCIAL SECTOR, FOREIGN BANKS, FOREIGN DEBT, GDP, GENERAL EQUILIBRIUM MODEL, ILLIQUIDITY, IMPORTS, INCENTIVE EFFECTS, INCOME, INEFFICIENCY, INTEREST RATE, LABOR COSTS, LENDING PRACTICES, LENDING RATES, MARKET INTEGRATION, MARKET VALUE, MICROECONOMICS, MORAL HAZARD, NET PROFIT, NONPERFORMING LOANS, PRIVATE BANKING, PRIVATIZATION, PROBABILITY OF DEFAULT, PRODUCERS, PRODUCTION FUNCTION, REPAYMENT, RISK PREMIUM, SAVINGS, TIME SERIES, TRANSITION ECONOMIES, VALUE OF OUTPUT, WEALTH, WELFARE GAINS, WORKING CAPITAL,
Online Access:	http://documents.worldbank.org/curated/en/2002/05/1790966/financial-sector-inefficiencies-debt-laffer-curve https://hdl.handle.net/10986/14799
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