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Corruption as Collateral

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  • Ouyang, Min
  • Zhang, Shengxing

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.

Suggested Citation

  • Ouyang, Min & Zhang, Shengxing, 2020. "Corruption as Collateral," MPRA Paper 98635, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:98635
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    File URL: https://mpra.ub.uni-muenchen.de/98635/1/MPRA_paper_98635.pdf
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    References listed on IDEAS

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    Cited by:

    1. Du, Julan & Li, Chang & Wang, Yongqin, 2023. "Shadow banking of non-financial firms: Arbitrage between formal and informal credit markets in China," Journal of Financial Intermediation, Elsevier, vol. 55(C).

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    More about this item

    Keywords

    Corruption; Relationship lending; Strategic defaults;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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