{"title":"Strategic default and optimal audit resources with costly state verification","authors":"Andreas Krause","doi":"10.1016/j.rie.2022.09.005","DOIUrl":null,"url":null,"abstract":"<div><p>I develop a model in which the ability to repay a loan is private information that can only be verified by the bank at some costs, which can be recovered from the borrower if it has reported untruthfully. The bank will optimize the resources it spends on this auditing of borrowers and the resulting equilibrium is then characterized. It is shown that in equilibrium, a significant fraction of companies default strategically, but most are captured via auditing. The failure rates of banks are also small. Finally extensions are discussed to include limited liability to banks and the partial recovery of auditing costs as well as punitive costs to borrowers.</p></div>","PeriodicalId":46094,"journal":{"name":"Research in Economics","volume":"76 4","pages":"Pages 413-421"},"PeriodicalIF":1.2000,"publicationDate":"2022-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://www.sciencedirect.com/science/article/pii/S1090944322000503/pdfft?md5=fb38f09d2e405dc2a86aec2b44e1b017&pid=1-s2.0-S1090944322000503-main.pdf","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Research in Economics","FirstCategoryId":"1085","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S1090944322000503","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q3","JCRName":"ECONOMICS","Score":null,"Total":0}
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Abstract
I develop a model in which the ability to repay a loan is private information that can only be verified by the bank at some costs, which can be recovered from the borrower if it has reported untruthfully. The bank will optimize the resources it spends on this auditing of borrowers and the resulting equilibrium is then characterized. It is shown that in equilibrium, a significant fraction of companies default strategically, but most are captured via auditing. The failure rates of banks are also small. Finally extensions are discussed to include limited liability to banks and the partial recovery of auditing costs as well as punitive costs to borrowers.
期刊介绍：
Established in 1947, Research in Economics is one of the oldest general-interest economics journals in the world and the main one among those based in Italy. The purpose of the journal is to select original theoretical and empirical articles that will have high impact on the debate in the social sciences; since 1947, it has published important research contributions on a wide range of topics. A summary of our editorial policy is this: the editors make a preliminary assessment of whether the results of a paper, if correct, are worth publishing. If so one of the associate editors reviews the paper: from the reviewer we expect to learn if the paper is understandable and coherent and - within reasonable bounds - the results are correct. We believe that long lags in publication and multiple demands for revision simply slow scientific progress. Our goal is to provide you a definitive answer within one month of submission. We give the editors one week to judge the overall contribution and if acceptable send your paper to an associate editor. We expect the associate editor to provide a more detailed evaluation within three weeks so that the editors can make a final decision before the month expires. In the (rare) case of a revision we allow four months and in the case of conditional acceptance we allow two months to submit the final version. In both cases we expect a cover letter explaining how you met the requirements. For conditional acceptance the editors will verify that the requirements were met. In the case of revision the original associate editor will do so. If the revision cannot be at least conditionally accepted it is rejected: there is no second revision.
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