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Asymmetric Information, Auditing Commitment, and Economic Growth

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  • WaiHong Ho
  • Yong Wang

Abstract

We analyze in this paper the growth and welfare consequences stemming from the lack of auditing commitment in a credit market with costly state verification. By studying two endogenous growth models, one of which allows lenders to commit to costly auditing strategies, whereas the other does not, we show that the inability to commit serves as a source of informational friction that results in more stringent contractual terms, which, in turn, result in lower capital accumulation, growth, and welfare. From the policy perspective, our analysis suggests a new microeconomic channel through which institutional failings hinder economic growth and social welfare.

Suggested Citation

  • 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.
    • Handle: RePEc:cje:issued:v:46:y:2013:i:2:p:611-633
    DOI: 10.1111/caje.12025
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    Cited by:

    1. Cheng Wang & Stephen D. Williamson, 1998. "Debt Contracts with Financial Intermediation with Costly Screening," Canadian Journal of Economics, Canadian Economics Association, vol. 31(3), pages 573-595, August.
    2. Wai-Hong Ho & Yong Wang, 2015. "Capital Income Taxation Revisited: The Roles of Information Friction and External Finance," Pacific Economic Review, Wiley Blackwell, vol. 20(2), pages 225-242, May.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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