Financial Collusion and Over-Lending

Jinyoung Hwang, Neville Jiang () and Ping Wang
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Neville Jiang: Department of Economics, Vanderbilt University

No 229, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: We build a model consisting of a borrowing firm, a lending institution (bank), and a third party influencing loan decision-making (auditor/government regulator) where a low-type firm can bribe the auditor to file an untruthful report about its true type so as to obtain a loan from the bank to finance a risky project. The main finding is that, depending on the economic environment, the bank may or may not want to deter such a collusion. This implies there may be a sudden shift from a collusion to a no-collusion equilibrium as the economic environment deteriorates. The combination of noticeable gradual deterioration in fundamentals and expectations of a sudden equilibrium-shift can trigger aggressive speculative attacks and passive withdrawals of investments even before the actual equilibrium-shift takes place. We apply this hypothesis to the case of the 1997 Korean financial crisis that features a severe over-lending problem.

Keywords: collusion; financial crisis; dishonest auditors; over-lending (search for similar items in EconPapers)
JEL-codes: D82 G30 O16 (search for similar items in EconPapers)
Date: 2002-09, Revised 2003-10
New Economics Papers: this item is included in nep-fin
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http://www.accessecon.com/pubs/VUECON/vu02-w29R.pdf Revised version, 2003 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:van:wpaper:0229

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