Corruption as Collateral

Min Ouyang and Shengxing Zhang
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Min Ouyang: Tsinghua SEM
Shengxing Zhang: London School of Economics

No 944, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We explore the role of corruption in assisting finance, when conventional collateralized lending is limited in economies like China. We build an agency-friction theory, in which corruption helps the bank to overcome the soft-budget constraint and induce entrepreneurs to invest in high quality projects and repay their debts. When the anti-corruption campaign causes collateral damage on corruption-backed finance, banks' search for yields leads to alternative lending based on pledging physical asset or stock shares; accordingly, the price of physical assets and the amount of equity pledge rise. We examine Chinese data at the regional level and the firm level, and find evidence supporting our theory. We argue the anti-corruption campaign alone without further financial-market institutional reforms may hinder financial intermediation, giving rise to undesirable consequences.

Date: 2019
New Economics Papers: this item is included in nep-ban, nep-cna and nep-tra
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Citations: View citations in EconPapers (1)

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