Corruption as Collateral
49 Pages Posted: 9 Mar 2020
Date Written: February 10, 2020
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.
Keywords: Corruption, Relationship lending, Strategic defaults
JEL Classification: E44, O16
Suggested Citation: Suggested Citation