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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)

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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File URL: http://www.unive.it/media/allegato/DIP/Economia/Working_papers/Working_papers_2006/WP_DSE_Piaser_29_06.pdf
File Function: First version, 2006
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Bibliographic Info

Paper provided by Department of Economics, University of Venice "Ca' Foscari" 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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Keywords: Common Agency; Financial Markets; Efficiency;

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References

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  1. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262061937, December.
  2. David Martimort & Lars Stole, 2001. "Contractual Externalities and Common Agency Equilibria," CESifo Working Paper Series, CESifo Group Munich 581, CESifo Group Munich.
  3. Michael Peters, 1999. "Common Agency and the Revelation Principle," Working Papers, University of Toronto, Department of Economics peters-99-01, University of Toronto, Department of Economics.
  4. Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 40, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. 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.
  6. David Martimort & Lars Stole, 2002. "The Revelation and Delegation Principles in Common Agency Games," Econometrica, Econometric Society, Econometric Society, vol. 70(4), pages 1659-1673, July.
  7. Bizer, David S & DeMarzo, Peter M, 1992. "Sequential Banking," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(1), pages 41-61, February.
  8. Enrica Detragiache & Paolo Garella & Luigi Guiso, 2000. "Multiple versus Single Banking Relationships: Theory and Evidence," Journal of Finance, American Finance Association, American Finance Association, vol. 55(3), pages 1133-1161, 06.
  9. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
  10. Michael Peters, 2000. "Negotiation and Take it or Leave it in Common Agency," Working Papers, University of Toronto, Department of Economics peters-00-02, University of Toronto, Department of Economics.
  11. Alberto Bisin & Piero Gottardi, 1998. "Competitive Equilibria with Asymmetric Information," Levine's Working Paper Archive 2062, David K. Levine.
  12. Alberto Bisin & Danilo Guaitoli, 2004. "Moral Hazard and Nonexclusive Contracts," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 306-328, Summer.
  13. B. Douglas Bernheim & Michael D. Whinston, 1997. "Incomplete Contracts and Strategic Ambiguity," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1787, Harvard - Institute of Economic Research.
  14. Besanko, David & Kanatas, George, 1993. "Credit Market Equilibrium with Bank Monitoring and Moral Hazard," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 6(1), pages 213-32.
  15. Christine A. Parlour & Uday Rajan, 2001. "Competition in Loan Contracts," American Economic Review, American Economic Association, American Economic Association, vol. 91(5), pages 1311-1328, December.
  16. Repullo, Rafael & Suarez, Javier, 1999. "Entrepreneurial Moral Hazard and Bank Monitoring: A Model of the Credit Channel," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2060, C.E.P.R. Discussion Papers.
  17. Ilya Segal & Michael D. Whinston, 2003. "Robust Predictions for Bilateral Contracting with Externalities," Econometrica, Econometric Society, Econometric Society, vol. 71(3), pages 757-791, 05.
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Citations

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Cited by:
  1. Agar Brugiavini & Gwenaël Piaser, 2006. "Nonexclusivity and adverse selection: An application to the annuity market," LSF Research Working Paper Series, Luxembourg School of Finance, University of Luxembourg 06-03, Luxembourg School of Finance, University of Luxembourg.
  2. Alberto Bennardo & Marco Pagano & Salvatore Piccolo, 2008. "Multiple-Bank Lending, Creditor Rights and Information Sharing," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 211, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 28 Jul 2010.
  3. Degryse, H.A. & Ioannidou, V. & Schedvin, E.L. von, 2011. "On the Non-Exclusivity of Loan Contracts: An Empirical Investigation," Discussion Paper, Tilburg University, Center for Economic Research 2011-130, Tilburg University, Center for Economic Research.
  4. Attar Andrea & Gwenäel Piaser & Nicolas Porteiro, 2006. "Common Agency Games with Separable Preferences," Working Papers, Department of Economics, University of Venice "Ca' Foscari" 2006_28, Department of Economics, University of Venice "Ca' Foscari".
  5. Attar, Andrea & Piaser, Gwenael & Porteiro, Nicolas, 2007. "A note on Common Agency models of moral hazard," Economics Letters, Elsevier, Elsevier, vol. 95(2), pages 278-284, May.
  6. Chassagnon, Arnold & Attar, Andrea, 2008. "On moral hazard and nonexclusive contracts," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/4717, Paris Dauphine University.
  7. Andrea Attar & Arnold Chassagnon, 2006. "On moral hazard and nonexclusive contracts," PSE Working Papers, HAL halshs-00589101, HAL.
  8. Attar, Andrea & Majumdar, Dipjyoti & Piaser, Gwenaël & Porteiro, Nicolás, 2008. "Common agency games: Indifference and separable preferences," Mathematical Social Sciences, Elsevier, Elsevier, vol. 56(1), pages 75-95, July.

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