Asymmetric Information, Auditing Commitment, and Economic Growth

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review

3 Scopus Citations
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Original languageEnglish
Pages (from-to)611-633
Journal / PublicationCanadian Journal of Economics
Volume46
Issue number2
Publication statusPublished - May 2013

Abstract

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. © Canadian Economics Association.