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Long Term Debt with Hidden Borrowing

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Author Info
Heski Bar-Isaac
Vicente Cuñat ()

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Abstract

We consider borrowers with the opportunity to raise funds from a competitive baking sector, that shares information about borrowers, and an alternative hidden lender. We highlight that the presence of the hidden lender restricts the contracts that can be obtained from the banking sector and that in equilibrium some borrowers obtain funds from both the banking sector and the (inefficient) hidden lender simultaneously. We further show that as the inefficiency of the hidden lender increases, total welfare decreases. By extending the model to examine a partially hidden lender, we further highlight the key role of information.

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Publisher Info
Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 803.

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Date of creation: Jan 2005
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Handle: RePEc:upf:upfgen:803

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Web page: http://www.econ.upf.edu/

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Related research
Keywords: Hidden Borrowing; Informal Lenders; Borrower Screening; Long Term Debt;

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
D14 - Microeconomics - - Household Behavior - - - Personal Finance

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    Other versions:
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    Other versions:
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    Other versions:
  7. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints And Interest Rates Matter For Consumer Behavior? Evidence From Credit Card Data," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 149-185, February. [Downloadable!] (restricted)
    Other versions:
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    Other versions:
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    Other versions:
    • David Laibson & Andrea Repetto & Jeremy Tobacman, 2000. "A Debt Puzzle," NBER Working Papers 7879, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October. [Downloadable!] (restricted)
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    Other versions:
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