Transition and Financial Collapse

H.F.H.V.S. Uhlig

    Research output: Working paperDiscussion paperOther research output

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    Abstract

    One of the many problems facing the countries in transition from socialism to capitalism after the initial phase of privatization and restructuring is the lack of proven entrepreneurial talent in addition to a low initial level of capital. New entrepreneurs might find it hard to finance their start-up enterprises. This paper therefore argues that a financial collapse and thus a collapse of the new entrepreneurial sector might occur. First, the lack of financial intermediation in transition economies is examined empirically before proceeding to a theoretical model. Using IMF data on claims to the private sector, we find that the extent of financial intermediation in these countries is comparable to developing rather than industrialized countries. The theoretical part analyzes an overlapping generations model with heterogenous entrepreneurial qualities and private information. A financial collapse can result, if young agents are too poor to provide enough collateral for financing a small project to prove their qualities as entrepreneur and no proven middle-aged entrepreneurs are available who can be entrusted with enough funds to run big projects. In that case, the economy contracts to an agricultural steady state. Possible remedies are discussed. In particular, large inequality or a large-scale, long-lasting government program of subsidizing investment help to overcome the danger of a financial collapse.
    Original languageEnglish
    PublisherCentER
    Volume1995-66
    Publication statusPublished - 1995

    Publication series

    NameCentER Discussion Paper
    Volume1995-66

    Fingerprint

    Entrepreneurs
    Financial intermediation
    Quality information
    Finance
    Remedies
    Financing
    Private sector
    Capitalism
    Transition economies
    Government
    Overlapping generations model
    Private information
    Socialism
    Start-up
    Developed countries
    Privatization

    Cite this

    Uhlig, H. F. H. V. S. (1995). Transition and Financial Collapse. (CentER Discussion Paper; Vol. 1995-66). CentER.
    Uhlig, H.F.H.V.S. / Transition and Financial Collapse. CentER, 1995. (CentER Discussion Paper).
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    Uhlig, HFHVS 1995 'Transition and Financial Collapse' CentER Discussion Paper, vol. 1995-66, CentER.

    Transition and Financial Collapse. / Uhlig, H.F.H.V.S.

    CentER, 1995. (CentER Discussion Paper; Vol. 1995-66).

    Research output: Working paperDiscussion paperOther research output

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    AU - Uhlig, H.F.H.V.S.

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    N2 - One of the many problems facing the countries in transition from socialism to capitalism after the initial phase of privatization and restructuring is the lack of proven entrepreneurial talent in addition to a low initial level of capital. New entrepreneurs might find it hard to finance their start-up enterprises. This paper therefore argues that a financial collapse and thus a collapse of the new entrepreneurial sector might occur. First, the lack of financial intermediation in transition economies is examined empirically before proceeding to a theoretical model. Using IMF data on claims to the private sector, we find that the extent of financial intermediation in these countries is comparable to developing rather than industrialized countries. The theoretical part analyzes an overlapping generations model with heterogenous entrepreneurial qualities and private information. A financial collapse can result, if young agents are too poor to provide enough collateral for financing a small project to prove their qualities as entrepreneur and no proven middle-aged entrepreneurs are available who can be entrusted with enough funds to run big projects. In that case, the economy contracts to an agricultural steady state. Possible remedies are discussed. In particular, large inequality or a large-scale, long-lasting government program of subsidizing investment help to overcome the danger of a financial collapse.

    AB - One of the many problems facing the countries in transition from socialism to capitalism after the initial phase of privatization and restructuring is the lack of proven entrepreneurial talent in addition to a low initial level of capital. New entrepreneurs might find it hard to finance their start-up enterprises. This paper therefore argues that a financial collapse and thus a collapse of the new entrepreneurial sector might occur. First, the lack of financial intermediation in transition economies is examined empirically before proceeding to a theoretical model. Using IMF data on claims to the private sector, we find that the extent of financial intermediation in these countries is comparable to developing rather than industrialized countries. The theoretical part analyzes an overlapping generations model with heterogenous entrepreneurial qualities and private information. A financial collapse can result, if young agents are too poor to provide enough collateral for financing a small project to prove their qualities as entrepreneur and no proven middle-aged entrepreneurs are available who can be entrusted with enough funds to run big projects. In that case, the economy contracts to an agricultural steady state. Possible remedies are discussed. In particular, large inequality or a large-scale, long-lasting government program of subsidizing investment help to overcome the danger of a financial collapse.

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    Uhlig HFHVS. Transition and Financial Collapse. CentER. 1995. (CentER Discussion Paper).