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Multiple Lending and Constrained Efficiency in the Credit Market

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Author Info
Andrea Attar (Università di Roma, La Sapienza, LUISS, University of Rome)
Eloisa Campioni (LUISS, University of Rome)
Gwenäel Piaser () (Department of Economics, University Of Venice Ca’ Foscari)

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Abstract

This paper studies the relationship between competition and incentives in an economy with financial contracts. We concentrate on non-exclusive credit relationships, those where an entrepreneur can simultaneously accept more than one contractual offer. Several homogeneous lenders compete on the contracts they offer to finance the entrepreneur's investment project. We model a common agency game with moral hazard, and we characterize its equilibria. As expected, notwithstanding the competition among the principals (lenders), non-competitive outcomes can be supported. In particular, positive profit equilibria are pervasive. We then provide a complete welfare analysis and show that all equilibrium allocations turn out to be constrained Pareto efficient.

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Publisher Info
Paper provided by University of Venice "Ca' Foscari", Department of Economics in its series Working Papers with number 2006_29.

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Length: 30 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:ven:wpaper:2006_29

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Related research
Keywords: Common Agency; Financial Markets; Efficiency;

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Find related papers by JEL classification:
D4 - Microeconomics - - Market Structure and Pricing
D6 - Microeconomics - - Welfare Economics
G2 - Financial Economics - - Financial Institutions and Services

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Bernheim, B Douglas & Whinston, Michael D, 1998. "Incomplete Contracts and Strategic Ambiguity," American Economic Review, American Economic Association, vol. 88(4), pages 902-32, September. [Downloadable!] (restricted)
    Other versions:
  2. Bisin, Alberto & Gottardi, Piero, 1999. "Competitive Equilibria with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 87(1), pages 1-48, July. [Downloadable!] (restricted)
    Other versions:
  3. Alberto Bisin & Danilo Guaitoli, 1998. "Moral Hazard and Non-Exclusive Contracts," Economics Working Papers 345, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  4. Enrica Detragiache & Paolo Garella & Luigi Guiso, 2000. "Multiple versus Single Banking Relationships: Theory and Evidence," Journal of Finance, American Finance Association, vol. 55(3), pages 1133-1161, 06. [Downloadable!] (restricted)
  5. Petersen, Mitchell A & Rajan, Raghuram G, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 407-43, May. [Downloadable!] (restricted)
    Other versions:
  6. Bizer, David S & DeMarzo, Peter M, 1992. "Sequential Banking," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 41-61, February. [Downloadable!] (restricted)
  7. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
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  8. Charles M. Kahn & Dilip Mookherjee, 1998. "Competition and Incentives with Nonexclusive Contracts," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 443-465, Autumn. [Downloadable!] (restricted)
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  9. Repullo, Rafael & Suarez, Javier, 2000. "Entrepreneurial moral hazard and bank monitoring: A model of the credit channel," European Economic Review, Elsevier, vol. 44(10), pages 1931-1950, December. [Downloadable!] (restricted)
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  10. Michael Peters, 1999. "Common Agency and the Revelation Principle," Working Papers peters-99-01, University of Toronto, Department of Economics. [Downloadable!]
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  11. Christine A. Parlour & Uday Rajan, 2001. "Competition in Loan Contracts," American Economic Review, American Economic Association, vol. 91(5), pages 1311-1328, December. [Downloadable!] (restricted)
  12. David Martimort & Lars Stole, 2003. "Contractual Externalities and Common Agency Equilibria," The B.E. Journal of Theoretical Economics, Berkeley Electronic Press, vol. 0(1). [Downloadable!]
  13. Peters, Michael, 2003. "Negotiation and take it or leave it in common agency," Journal of Economic Theory, Elsevier, vol. 111(1), pages 88-109, July. [Downloadable!] (restricted)
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  14. Ilya Segal & Michael D. Whinston, 2003. "Robust Predictions for Bilateral Contracting with Externalities," Econometrica, Econometric Society, vol. 71(3), pages 757-791, 05. [Downloadable!] (restricted)
  15. Martimort, David & Stole, Lars, 1999. "Contractual Externalities and Common Agency Equilibria," IDEI Working Papers 110, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2003. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bennardo, Alberto & Pagano, Marco & Piccolo, Salvatore, 2009. "Multiple-Bank Lending, Creditor Rights and Information Sharing," CEPR Discussion Papers 7186, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Agar Brugiavini & Gwenaël Piaser, 2006. "Nonexclusivity and adverse selection: An application to the annuity market," Working Papers of CREFI-LSF (Centre of Research in Finance - Luxembourg School of Finance) 06-03, CREFI-LSF, University of Luxembourg. [Downloadable!]
    Other versions:
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