The Role of Incentives in the Prevention of Financial Crises in Emerging Economies

Amar Gande, Kose John, Lemma W. Senbet
2000 Social Science Research Network  
Overview ! Complex system of incentives with multiple players: IMF, social planner, local banks, local firms, and external lenders ! Generalized approach that simultaneously solves banking and corporate sector incentive problems. Overview ! Implicit/explicit bailouts induce overinvestment and risk-shifting incentives. ! Risky debt mitigates over-investment but aggravates risk-shifting incentives. ! Currency shock induces endogenous risk taking (i.e., exacerbates riskshifting) and could result
more » ... and could result in a contagion. ! Vulnerability to a financial crisis is not predicated on currency risk. Overview ! Risk-shifting incentives can be curbed through warrants/specialized tax schemes. ! Proportional taxes and deposit insurance (alone) do not work. ! Over-investment incentives can be curbed through risky debt, especially in countries with good corporate governance. ! Implementation issues.
doi:10.2139/ssrn.253802 fatcat:phjrunecozcvbp7zehl5gxp3my