Erik Berglöf

Short-Term versus Long-Term Interests: Capital Structure with Multiple Investors

We study the problem of financial contracting and renegotiation between a firm and outside investors when the firm cannot commit to future payouts, but assets can be contracted upon. We show that a capital structure with multiple investors specializing in short-term and long-term claims is superior to a structure with only one type of claim, because this hardens the incentives for the entrepreneur to renegotiate the contract ex post. Depending on the parameters, the optimal capital structure also differentiates between state-independent and state-dependent longterm claims, which can be interpreted as long-term debt and equity.

The Changing Corporate Governance Paradigm: Implications for Transition and Developing Countries

The rapidly growing literature studying the relationship between legal origin, investor protection, and finance has stimulated an important debate in academic circles. It has also generated a number of applied research projects and strong policy statements. This paper discusses the implications, in particular for developing and transition countries, from this literature. We conclude that its focus on the plight of small investors is too narrow when applied to these countries. We argue that this group is unlikely to play an important role in most developing and transition countries. External investors may still be crucial, but they are more likely to come in as strategic investors or creditors. The paper also proposes a broader paradigm including other stakeholders and mechanisms of governance in order to better understand the problems facing these countries and generate policy implications that compensate for the weaknesses of capital markets.

Soft budget constraints and credit crunches in financial transition

Abstract This paper provides a framework for understanding the lingering problem of soft budget constraints in many transition economies even after the macroeconomic situation has been stabilized and a sound banking system has been introduced. We show that soft budget constraints can persist and even coexist with credit crunches, as the existing evidence from transition economies seems to indicate. As in Dewatripont and Maskin (Credit and efficiency in centralized and decentralized economies, Review of Economic Studies, 1995), the existence of sunk costs in existing loans may also give rise to soft budget constraints when banks themselves are subject to hard budget constraints and have outside options. We endogenize the outside option by allowing banks to allocate available funds between new lending and refinancing of old loans. The option to invest in new lending hardens budget constraints when the average quality of investment projects is high and varied. Otherwise soft budget constraints may persist. In the latter case, refinancing of old loans crowds out new finance, giving rise to credit crunches on new loans. By screening and monitoring firms banks can improve the relative profitability of new lending and break out of soft budget constraint equilibria. Unlike Dewatripont and Maskin, larger banks may be harder than smaller banks because they have the resources and higher incentives to invest in screening and monitoring.

Club-in-the-Club: Reform under Unanimity

In many organizations, decisions are taken by unanimity giving each member veto power. We analyze a model of an organization in which members with heterogenous productivity privately contribute to a common good. Under unanimity, the least efficient member imposes her preferred effort choice on the entire organization. The threat of forming an “inner organization” can undermine the veto power of the less efficient members and coerce them to exert more effort. We also identify the conditions under which the threat of forming an inner organization is executed. Finally, we show that majority rules effectively prevent the emergence of inner organizations.

European Transition at Twenty Assessing Progress in Countries and Sectors

As Central and Eastern Europe are marking the end of communism and the commencement of the process of transition towards democracy and market economy, it is natural to ask how far they have progressed relative to the objectives set at the time. How different is the transition region still from that of other countries at comparable levels of economic prosperity? Are there major differences within the transition region in this regard? In which countries and sectors, in particular, does the transition agenda remain incomplete? What should be the main priorities for future reforms?

New structural economics meets European transition

This paper explores whether new structural economics, and more broadly Structuralist approaches, could add to our understanding of transition in Central and Eastern Europe - and ultimately asks whether new structural economics and transition economics might be extended or integrated into a dynamic model of structural transformation that could better account for this particular development experience and provide policy guidance for the future. We have presented three perspectives - new structural economics, transition economics and the Neo-Schumpetarian approach - all of them emphasising different aspects of structural transformation. Their relative explanatory power depends on the context - for example, the extent of distortions in the economy, the quality of the institutions and where a country finds itself relative to the world technology frontier - and the questions we are interested in understanding. We suggest that, to date, the Neo-Schumpetarian approach offers the most promising and persuasive story line to think about this difficult challenge.This paper explores whether new structural economics, and more broadly Structuralist approaches, could add to our understanding of transition in Central and Eastern Europe – and ultimately asks whether new structural economics and transition economics might be extended or integrated into a dynamic model of structural transformation that could better account for this particular development experience and provide policy guidance for the future. We have presented three perspectives – new structural economics, transition economics and the Neo-Schumpetarian approach – all of them emphasising different aspects of structural transformation. Their relative explanatory power depends on the context – for example, the extent of distortions in the economy, the quality of the institutions and where a country finds itself relative to the world technology frontier – and the questions we are interested in understanding. We suggest that, to date, the Neo-Schumpetarian approach offers the most promising and persuasive story line to think about this difficult challenge.

European Industrial Policy — Tapping the Full Growth Potential of the EU

Europe, like many of the world’s advanced economies, is facing a fundamental growth challenge. Growth has slowed in the wake of the global financial crisis, as investment has decreased and the legacy of non-performing loans and uncertainty about the institutional arrangements established in response to the crisis are likely to be with us for years. However, the evidence suggests that this slowdown started before the crisis, as improvements in productivity did not come at the same pace as in the past.

Transition economics meet new structural economics: editorial introduction

The 2008 global financial crisis has spurred much debate regarding the soundness of mainstream economic theories, in particular of the so-called neoclassical economic mainstream and the closely associated policy approach known as the “Washington Consensus”. As these theories and conceptual perspectives have played a particularly important role in guiding economic transition in central and eastern Europe and former Soviet Union, the global region most affected by the crisis, it is natural to use the experience of this region to ask important questions about the process of institutional change and economic development. Over the last 25 years, the economies of eastern Europe and former Soviet Union – the European transition economies – have gone through a remarkable economic and political transformation, perhaps the most dramatic institutional change in such a short time period in history. However, that process now seems stuck – and stuck at very different levels of quality of economic and political institutions. Has the European transition model run out of steam and does it need to be replaced by some other model? Moreover, all these economies experienced deep recessions in the early years of transition, sometimes losing up to half their output over several years. Many of them also proved to be vulnerable to the 1998 Russian financial crisis. After strong growth in the 1998–2008 period, these economies again experienced significant output losses in the first year of the global financial crisis. Were these vulnerabilities caused or at least amplified by the embrace of the model of global integration advocated by mainstream economics? The global financial crisis did not affect all countries in central and eastern Europe and former Soviet union to the same extent. For example, central Europe and the Baltics came out of the crisis more quickly and growth has resumed, while southeast Europe still struggles with sluggish growth. Many resource economies in the region now also have to cope with the slowdown in the global boom and the volatility of prices in commodity markets. Can we exploit this variation within the European transition region to better understand how to create a less fragile basis for long-term growth? The new EU Member States have anchored themselves to the wider EU institutional framework as a way to ensure international credibility and reduce trial and error and

Transition economics meets new structural economics

Reference EPFL-ARTICLE-212216doi:10.1080/17487870.2015.1018691View record in Web of Science Record created on 2015-09-28, modified on 2016-08-09

Why This Time Is Different for Ukraine

The Ukrainian government has committed to implement far-reaching reforms in exchange for the support it is getting from the international community, led by the International Monetary Fund (IMF). Understandably, given Ukraine’s disappointing transition history, there is widespread scepticism on whether the country will live up to its commitments. Three failed IMF programmes later, the fundamental question is: Is it different this time?