COLLUSION AND OVERLENDING |
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| Authors: | JINYOUNG HWANG NEVILLE JIANG PING WANG |
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| Affiliation: | Hwang:;Assistant Professor of Economics, Department of Economics, Hannam University, Daejeon 301-791, Republic of Korea. Phone 82-042-629-7114, Fax 82-042-625-5874, E-mail Jiang:;Assistant Professor of Economics, Department of Economics, University of Massachusetts Lowell, Lowell, MA 01854. Phone 978-934-2779, Fax 978-934-3071, E-mail Wang:;Professor of Economics, Department of Economics, Washington University in St. Louis, One Brookings Drive, Campus Box 1208, St Louis, MO 63130. Phone 314- 935-5632, Fax 314-935-4156, E-mail: |
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| Abstract: | This study provides a theoretical background for collusion-induced overlending being the main cause of the 1997 Korean financial crisis. Our model consists of a lending institution, a borrowing chaebol of an unknown type, and an informed politician who can influence lending decision. We show that collusion can be formed between a low-type chaebol and the politician, and it may not be the lending institution's best interest to deter such collusion. This equilibrium, however, is possible only when the economic environment is favorable. When the economy deteriorates, the expectations of the fall of the collusion equilibrium can trigger financial crisis. (JEL G30, D82, O16) |
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