East Asian Crisis as a Result of Institutional Failures-Lessons for India

Institutional Failures Lessons for India Murali Patibandla Ramkanta Prusty We argue in this paper that the underlying factor behind the east Asian financial crisis is institutional failure in the context of financial sector liberalisation. Mature free market economies function on the basis of institutions that minimise informational imperfections and transaction costs and facilitate a high degree of transparency and accountability of government regulatory agents. When the institutional conditions fail to hold or are incomplete it results in adverse selection and moral hazard behaviour under principal and agency relations. These institutional failures are very much relevant to the Indian financial markets in the present context.