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Relying on the Information of Others: Debt Rescheduling with Multiple Lenders

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Author Info
Claude Fluet (Université du Quèbec à Montréal and CIRPEE)
Paolo G. Garella (University of Milan and LdA)

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Abstract

Can inertia in terminating unsuccessful loans (creditor passivity) be due to the multiplicity of lenders in loan arrangements? Can a lender reschedule, betting against his odds? Private information in the form of bad but coarse news, that would prompt foreclosure on its own, will instead lead to rescheduling. The gamble is that other lenders may have sharper information. At equilibrium, rescheduling occurs even if all lenders received bad news. This is ine¢ cient (increasing the cost of capital) compared to perfect information sharing. However, barren information sharing, at equilibrium there is no excess reliance on the information of others from a social point of view. The paper also contains an extension dealing with \"…financial scandals\".

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Publisher Info
Paper provided by Centro Studi Luca d\'Agliano, University of Milano in its series Development Working Papers with number 232.

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Length: 34
Date of creation: 07 Nov 2007
Date of revision:
Handle: RePEc:csl:devewp:232

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Related research
Keywords: Debt contracts; asymmetric information; rescheduling; in- solvency; Bayesian games.;

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Find related papers by JEL classification:
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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