Corruption, Default and Optimal Credit in Welfare Programs
In this paper we present a dynamic model of subsidized credit provision to examine how asymmetric information exacerbates ineciency caused by corruption. Though designed to empower the underprivileged, the fate of such credit programs largely depends on the eciency of the credit delivery system. Corruption often erodes this eciency. Nevertheless, when a corrupt loan ocial and a borrower interact with symmetric information, credit terms can be so designed that corruption will aect only the size of the surplus, but not repayment. With private information on the borrower's productivity this result changes. The corrupt loan ocial may induce the low productivity borrower to default, mainly because of high revelation costs. The government can improve the repayment rate, but will have to under-provide the rst period loan. On the other hand it can permit default by the low productivity borrower, and maintain a higher credit level. The second option may sometimes be preferred. This inecient outcome is caused by two factors - informational ratchet eects and countervailing incentives, which are commonly present in many agency relationships.
|Date of creation:||Jan 2004|
|Contact details of provider:|| Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200|
Web page: http://www.eaber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hindriks, J. & Keen, M. & Muthoo, A., 1998.
"Corruption, Extortion and Evasion,"
9809, Exeter University, Department of Economics.
- Hindriks, J. & Keen, M. & Muthoo, A., 1996. "Corruption, Extortion and Evasion," Papers 179, Notre-Dame de la Paix, Sciences Economiques et Sociales.
- HINDRIKS, Jean & KEEN, Michael & MUTHOO, Abhinay, . "Corruption, extortion and evasion," CORE Discussion Papers RP 1671, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Mishra, Ajit, 2002.
"Hierarchies, incentives and collusion in a model of enforcement,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 47(2), pages 165-178, February.
- A Mishra, . "Hierarchies, Incentives And Collusion In Model Of Enforcement," Dundee Discussion Papers in Economics 067, Economic Studies, University of Dundee.
- Ajit Mishra, 1996. "Hierarchies, Incentives And Collusion In A Model Of Enforcement," Working papers 34, Centre for Development Economics, Delhi School of Economics.
- Ajit Mishra, 2000. "Hierarchies, Incentives And Collusion In A Model Of Enforcement," Dundee Discussion Papers in Economics 112, Economic Studies, University of Dundee.
- Abhijit V. Banerjee, 1997. "A Theory of Misgovernance," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1289-1332.
- Jay Pil Choi & Marcel Thum, 2000.
"The Dynamics of Corruption with the Ratchet Effect,"
CESifo Working Paper Series
334, CESifo Group Munich.
- Choi, Jay Pil & Thum, Marcel, 2003. "The dynamics of corruption with the ratchet effect," Journal of Public Economics, Elsevier, vol. 87(3-4), pages 427-443, March.
- Choi, Jay Pil & Thum, Marcel, 2001. "The dynamics of corruption with the Ratchet effect," Dresden Discussion Paper Series in Economics 04/01, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
- Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December.
- Saha, Bibhas, 2001. "Red tape, incentive bribe and the provision of subsidy," Journal of Development Economics, Elsevier, vol. 65(1), pages 113-133, June.
- repec:cup:cbooks:9780521632935 is not listed on IDEAS
- Hoff, Karla & Stiglitz, Joseph E, 1990. "Imperfect Information and Rural Credit Markets--Puzzles and Policy Perspectives," World Bank Economic Review, World Bank Group, vol. 4(3), pages 235-50, September.
- Lui, Francis T, 1985. "An Equilibrium Queuing Model of Bribery," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 760-781, August.
- Maggi G. & Rodriguez-Clare A., 1995. "On Countervailing Incentives," Journal of Economic Theory, Elsevier, vol. 66(1), pages 238-263, June.
- Isaac Ehrlich & Francis T. Lui, 1999. "Bureaucratic Corruption and Endogenous Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 107(S6), pages S270-S293, December.
- Marjit, Sugata & Mukherjee, Vivekananda & Mukherjee, Arijit, 2000. "Harassment, corruption and tax policy," European Journal of Political Economy, Elsevier, vol. 16(1), pages 75-94, March.
- Erwin H Tiongson & Hamid R Davoodi & Sanjeev Gupta, 2000. "Corruption and the Provision of Health Care and Education Services," IMF Working Papers 00/116, International Monetary Fund.
- repec:cup:cbooks:9780521659123 is not listed on IDEAS
- Chaudhuri, Sarbajit & Gupta, Manash Ranjan, 1996. "Delayed formal credit, bribing and the informal credit market in agriculture: A theoretical analysis," Journal of Development Economics, Elsevier, vol. 51(2), pages 433-449, December.
- Banerjee, A.V., 1997. "A Theory of Misgovernance," Working papers 97-4, Massachusetts Institute of Technology (MIT), Department of Economics.
- Saha, Bibhas, 2003. "Harassment, corruption and tax policy: a comment on Marjit, Mukherjee and Mukherjee [Eur. J. Political Economy 16 (2000) 75-94]," European Journal of Political Economy, Elsevier, vol. 19(4), pages 893-897, November.
When requesting a correction, please mention this item's handle: RePEc:eab:microe:22392. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shiro Armstrong)
If references are entirely missing, you can add them using this form.