Asymmetric Information, Auditing Commitment, and Economic Growth

We analyze in this paper the growth and welfare consequences stemming from the lack of auditing commitment in a credit market with costly state verification. By studying two endogenous growth models, one of which allows lenders to commit to costly auditing strategies, whereas the other does not, we...

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Bibliographic Details
Published in:The Canadian journal of economics 2013-05, Vol.46 (2), p.611-633
Main Authors: Ho, Wai-Hong, Wang, Yong
Format: Article
Language:English
Subjects:
Asymmetric information
Auditing
Bond markets
Capital accumulation
Cheating
Credit
Credit market
D82
Economic commitments
Economic growth
Economic growth models
Growth models
Information audits
Lenders
Loan rates
Market equilibrium
Microeconomics
Nash equilibrium
O41
Studies
Tax audits
Welfare
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Summary:We analyze in this paper the growth and welfare consequences stemming from the lack of auditing commitment in a credit market with costly state verification. By studying two endogenous growth models, one of which allows lenders to commit to costly auditing strategies, whereas the other does not, we show that the inability to commit serves as a source of informational friction that results in more stringent contractual terms, which, in turn, result in lower capital accumulation, growth, and welfare. From the policy perspective, our analysis suggests a new micro-economic channel through which institutional failings hinder economic growth and social welfare. On les conséquences sur la croissance et le niveau de bien-être du manque d'engagement à la vérification dans un marché du crédit où la vérification coûte cher à l'État. En étudiant deux modèles de croissance endogène - l'un dans lequel les prêteurs s'engagent à des stratégies de vérification coûteuses, et l'autre pas-on montre que l'inhabileté à s'engager est à la source de friction informationnelle qui résulte en des contrats avec des exigences de conformité plus rigoureuses, qui, à leur tour, se traduisent en accumulation de capital, croissance et bien-être réduits. Du point de vue de la politique publique, l'analyse suggère un nouveau canal microéconomique à travers lequel le bruit institutionnel se traduit par un ralentissement de la croissance économique et du bien-être social.
ISSN:0008-4085
1540-5982
DOI:10.1111/caje.12025