Asymmetric Information, Auditing Commitment and Economic Growth
AbstractWe analyze in this paper the growth and welfare consequences arising from the lack of auditing commitment in a credit market with costly state verification. Specifically, two endogenous growth models, of which one allows lenders to commit to costly auditing strategies to identify borrowers' investment returns and the other does not, are compared. We show that the inability to commit acts as an additional source of informational friction that leads to more stringent contractual terms, which in turn result in lower capital accumulation, growth, and welfare. In addition, when a tax on capital is considered, the tax-induced investment distortions are amplified by the absence of auditing commitment. From the policy perspective, our analysis can be interpreted as suggesting a new micro-economic channel through which institutional failings hinder economic growth and social welfare.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 17469.
Date of creation: Dec 2008
Date of revision:
Asymmetric Information; Costly State Verification; Auditing Commitment; Economic Growth; Time consistency;
Other versions of this item:
- WaiHong Ho & Yong Wang, 2013. "Asymmetric Information, Auditing Commitment, and Economic Growth," Canadian Journal of Economics, Canadian Economics Association, vol. 46(2), pages 611-633, May.
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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