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Corruption as Collateral

Author

Listed:
  • Min Ouyang

    (Tsinghua SEM)

  • Shengxing Zhang

    (London School of Economics)

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.

Suggested Citation

  • Min Ouyang & Shengxing Zhang, 2019. "Corruption as Collateral," 2019 Meeting Papers 944, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:944
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    References listed on IDEAS

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    1. repec:bla:etrans:v:9:y:2001:i:1:p:1-27 is not listed on IDEAS
    2. Xu, Cheng-Gang & Maskin, Eric, 2001. "Soft Budget Constraint Theories: From Centralization to the Market," CEPR Discussion Papers 2715, C.E.P.R. Discussion Papers.
    3. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-548, June.
    4. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
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    Cited by:

    1. Alicia H. Dang & Roberto Samaniego, 2022. "R&D, Industrial Policy and Growth," JRFM, MDPI, vol. 15(8), pages 1-42, August.

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