The hazard of moral hazard: Untangling the Asian crisis

The paper critically examines the explanations of the Asian crisis which emphasize the role of national policies and institutions that allegedly created moral hazard by overprotecting the investors-industrial policy, crony capitalism, and government guarantees accorded to banks and industrial firms that are considered too important to fail. We also discuss the international dimension of the moral hazard argument in the presence of International Monetary Fund (IMF) bail-out. The paper finds these explanations theoretically ill-defined and empirically weak, and argues that the prescriptions for changes in policy and institutions based on them are unlikely to prevent similar kinds of crises in the future. (C) 2000 Elsevier Science Ltd. All rights reserved.