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Financial Collusion and Over-Lending

  • Jinyoung Hwang

    (Korea University)

  • Neville Nien-Heui Jiang


    (Department of Economics, Vanderbilt University)

  • Ping Wang


    (Department of Economics, Vanderbilt University, NBER)

We build a model consisting of a borrowing firm, a lending institution (bank), and a third party influencing loan decision-making (auditor/government regulator) where a low-type firm can bribe the auditor to file an untruthful report about its true type so as to obtain a loan from the bank to finance a risky project. The main finding is that, depending on the economic environment, the bank may or may not want to deter such a collusion. This implies there may be a sudden shift from a collusion to a no-collusion equilibrium as the economic environment deteriorates. The combination of noticeable gradual deterioration in fundamentals and expectations of a sudden equilibrium-shift can trigger aggressive speculative attacks and passive withdrawals of investments even before the actual equilibrium-shift takes place. We apply this hypothesis to the case of the 1997 Korean financial crisis that features a severe over-lending problem.

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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0229.

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Date of creation: Sep 2002
Date of revision: Oct 2003
Handle: RePEc:van:wpaper:0229
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  1. Becsi, Zsolt & Wang, Ping & Wynne, Mark A., 1999. "Costly intermediation, the big push and the big crash," Journal of Development Economics, Elsevier, vol. 59(2), pages 275-293, August.
  2. Robert J. Barro, 2001. "Economic Growth in East Asia Before and After the Financial Crisis," NBER Working Papers 8330, National Bureau of Economic Research, Inc.
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