The hazard of moral hazard: Untangling the Asian crisis

The paper critically examines the explanations of the Asian crisis which em phasize the role of national policies and institutions that allegedly creat ed moral hazard by overprotecting the investors-industrial policy, crony ca pitalism, and government guarantees accorded to banks and industrial firms that are considered too important to fail. We also discuss the internationa l dimension of the moral hazard argument in the presence of International M onetary Fund (IMF) bail-out. The paper finds these explanations theoretical ly ill-defined and empirically weak, and argues that the prescriptions for changes in policy and institutions based on them are unlikely to prevent si milar kinds of crises in the future. (C) 2000 Elsevier Science Ltd. All rig hts reserved.