Optimal Debt Contracts when Credit Managers are (Perhaps) Corruptible

Ingela Alger ()

No 648, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: The paper derives the optimal organizational response of a bank (the principal) which faces a risk of collusion between the credit manager (the agent) and the credit-seeking firms. The bank can deter collusion either through internal incentives or by distorting the credit contracts. The model thus explicitly takes into account the interaction between internal (collusion) risks and external (default) risks in the optimal design of the internal organization as well as of the credit contracts. We investigate this question in two settings. In the first one, we adopt the standard assumption that the agent is always willing to collude (is corruptible) if that increases his monetary payoff. In the second one, he is corruptible with some probability only, and honest otherwise. A novel feature of our approach is to allow for screening among corruptible and honest agents. We find that if the probability that the agent is honest is sufficiently large, collusion occurs in equilibrium.

New Economics Papers: this item is included in nep-ban, nep-cfn, nep-fmk and nep-reg
Date: Written
View list of references

Downloads: (external link)
http://fmwww.bc.edu/EC-P/WP648.pdf main text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:boc:bocoec:648

Access Statistics for this paper

More papers in Boston College Working Papers in Economics from Boston College Department of Economics
Address: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Contact information at EDIRC.
Series data maintained by Christopher F Baum ().