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Financial Collusion and Over-Lending

Author

Listed:
  • Jinyoung Hwang

    (Korea University)

  • Neville Nien-Heui Jiang

    (Department of Economics, Vanderbilt University)

  • Ping Wang

    (Department of Economics, Vanderbilt University, NBER)

Abstract

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.

Suggested Citation

  • Jinyoung Hwang & Neville Nien-Heui Jiang & Ping Wang, 2002. "Financial Collusion and Over-Lending," Vanderbilt University Department of Economics Working Papers 0229, Vanderbilt University Department of Economics, revised Oct 2003.
    • Handle: RePEc:van:wpaper:0229
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    collusion; financial crisis; dishonest auditors; over-lending;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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