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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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    File URL: http://www.accessecon.com/pubs/VUECON/vu02-w29R.pdf
    File Function: Revised version, 2003
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    collusion; financial crisis; dishonest auditors; over-lending;

    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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