Corruption as Collateral

49 Pages Posted: 9 Mar 2020

See all articles by Min Ouyang

Min Ouyang

Department of Economics, School of Economics and Management, Tsinghua University

Shengxing Zhang

London School of Economics (LSE) - Department of Economics

Date Written: February 10, 2020

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.

Keywords: Corruption, Relationship lending, Strategic defaults

JEL Classification: E44, O16

Suggested Citation

Ouyang, Min and Zhang, Shengxing, Corruption as Collateral (February 10, 2020). Available at SSRN: https://ssrn.com/abstract=3537061 or http://dx.doi.org/10.2139/ssrn.3537061

Min Ouyang (Contact Author)

Department of Economics, School of Economics and Management, Tsinghua University ( email )

Beijing, 100084
China
(+86) 010-62798677 (Phone)

HOME PAGE: http://https://minouyang.weebly.com

Shengxing Zhang

London School of Economics (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

HOME PAGE: http://https://sites.google.com/site/oo7zsx/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
52
Abstract Views
222
rank
399,453
PlumX Metrics