INSTITUTIONS AND THE VICIOUS CIRCLE OF DISTRUST IN THE RUSSIAN HOUSEHOLD DEPOSIT MARKET, 1992-1999

Abstract

In our analysis of the Russian household deposit market during the 1990s, we show how the initial conditions of market emergence contributed to a vicious circle in which private commercial banks progressively lost the trust of potential depositors. The roots of this destructive dynamic lay in the initial conditions of market emergence. Initial experiences of fraud and financial loss led Russian households to distrust that commercial banks would honor their contractual obligations. As distrust grew and became more ingrained, the competitive conditions in the deposit market changed in a way that further increased the gains to opportunism and decreased the returns to trust production. In a self-reinforcing process, fraud begat more fraud.http://deepblue.lib.umich.edu/bitstream/2027.42/39974/3/wp588.pd