TY  - JOUR
AU  - Agenor,Pierre-Richard
AU  - Aizenman,Joshua
TI  - Financial Sector Inefficiencies and Coordinate Failures: Implications for Crisis Management
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7446
PY  - 1999
Y2  - December 1999
UR  - http://www.nber.org/papers/w7446
L1  - http://www.nber.org/papers/w7446.pdf
N1  - Author contact info:
Pierre-Richard Agenor
School of Social Sciences, University of Mancheste
Manchester M139PL, United Kingdom
E-Mail: Pierre-richard.Agenor@manchester.ac.uk

Joshua Aizenman
Economics and SIR
USC
University Park
Los Angeles, CA 90089-0043
Tel: 213-740-4066
E-Mail: aizenman@usc.edu
AB  - This paper analyzes the implication of inefficient financial intermediation for crisis management in a country where firms are highly-indebted.  The analysis is based on a model in which firms rely on bank credit to finance their working capital needs and lenders face high state verification and enforcement costs of loan contracts.  The analysis shows that higher contract enforcement and verification costs, lower expected productivity, or higher volatility, may shift the economy to the wrong side of the debt Laffer curve, with potentially sizable employment and output losses.  The main implication of this analysis for the current policy debate on crisis management is East Asia is that dept reduction, in addition to debt rescheduling, may be required as part of the process of reducing financial sector inefficiencies.
ER  -