Corruption as Collateral

Min Ouyang and Shengxing Zhang

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Corruption; Relationship lending; Strategic defaults (search for similar items in EconPapers)
JEL-codes: E44 O16 (search for similar items in EconPapers)
Date: 2020-02-10
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:98635

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