Corruption, Default and Optimal Credit in Welfare Programs

Bibhas Saha and Trivikraman Thampy

Microeconomics Working Papers from East Asian Bureau of Economic Research

Abstract: In this paper we present a dynamic model of subsidized credit provision to examine how asymmetric information exacerbates ineciency caused by corruption. Though designed to empower the underprivileged, the fate of such credit programs largely depends on the eciency of the credit delivery system. Corruption often erodes this eciency. Nevertheless, when a corrupt loan ocial and a borrower interact with symmetric information, credit terms can be so designed that corruption will aect only the size of the surplus, but not repayment. With private information on the borrower's productivity this result changes. The corrupt loan ocial may induce the low productivity borrower to default, mainly because of high revelation costs. The government can improve the repayment rate, but will have to under-provide the rst period loan. On the other hand it can permit default by the low productivity borrower, and maintain a higher credit level. The second option may sometimes be preferred. This inecient outcome is caused by two factors - informational ratchet eects and countervailing incentives, which are commonly present in many agency relationships.

Keywords: corruption; Information rent; Countervailing incentives (search for similar items in EconPapers)
Date: 2004-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.eaber.org/node/22392 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 301 [REDIRECT LOOP] Moved Permanently (http://www.eaber.org/node/22392 [301 Moved Permanently]--> https://www.eaber.org/node/22392 [301 Moved Permanently]--> https://www.eaber.org/node/22392 [301 Moved Permanently]--> https://www.eaber.org/node/22392 [301 Moved Permanently]--> https://www.eaber.org/node/22392 [301 Moved Permanently]--> https://www.eaber.org/node/22392 [301 Moved Permanently]--> https://www.eaber.org/node/22392 [301 Moved Permanently]--> https://www.eaber.org/node/22392)

Related works:
Working Paper: Corruption, Default and Optimal Credit in Welfare Programs (2008)
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: https://EconPapers.repec.org/RePEc:eab:microe:22392

Access Statistics for this paper

More papers in Microeconomics Working Papers from East Asian Bureau of Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Shiro Armstrong ().