Corruption as Collateral

Ouyang, Min and Zhang, Shengxing (2020): Corruption as Collateral.

Abstract

We propose corruption can substitute for conventional collateral in enforcing financial commitments when institutions are poor. A theoretical framework with agency frictions is built, in which corruptive relations with government officials keep firms committed to loan payments. Based on this framework, we hypothesize the anti-corruption investigation destroys the commitment mechanism so that firms default and, most importantly, firms default strategically as long as they can substitute corruption with other collateral. We investigate regional data and firm-level data from China, and find powerful evidence supporting our hypotheses.

• Item Type: MPRA Paper
• Language: English
• Keywords: Corruption, Relationship lending, Strategic defaults
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance

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