The Role of Credit Markets in a Transition Economy with Incomplete Public Information
February 1, 1996
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Summary
In this paper we explore some of the informational problems that constrain the development of credit markets in transition economies. We characterize investment patterns under uncertainty and high costs of entry, when agents learn about the ultimate value of enterprises through production in a Bayesian way. Inefficiencies due to the lack of public information reduce the average return to capital. Under asymmetric information, credit would go to activities that can provide enough co-finance. Credit markets may fail to develop for a while if there is not enough individual wealth to complement credit. Once they operate, credit markets may magnify distortions in equity markets, such as those due to spontaneous privatization. An argument for the sequencing of capital market liberalization is provided.
Subject: Credit, Environment, Financial institutions, Financial markets, Loans, Money, Stock markets, Stocks
Keywords: agency problem, Credit, credit market, Eastern Europe, Loans, market economy, net revenue, opportunity cost, present value, representative firm, state enterprise, Stock markets, Stocks, WP
Pages:
26
Volume:
1996
DOI:
Issue:
018
Series:
Working Paper No. 1996/018
Stock No:
WPIEA0181996
ISBN:
9781451922776
ISSN:
1018-5941
