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The Optimal Concentration of Creditors

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  • Ivo Welch
  • Arturo Bris

Abstract

Our model assumes that creditors need to expend resources to collect on claims. Consequently, because diffuse creditors suffer from mutual free-riding (Holmstrom (1982)), they fare worse than concentrated creditors (e.g. a house bank). The model predicts that measures of debt concentration relate positively to creditors' (aggregate) debt collection expenditures and positively to management's chosen expenditures to resist paying. However, collection activity is purely redistributive, so social waste is larger when creditors are concentrated. If borrower quality is not known, the best firms choose the most concentrated creditors and pay higher expected yields.

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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm248.

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Date of creation: 01 Nov 2001
Date of revision: 01 Apr 2004
Handle: RePEc:ysm:somwrk:ysm248

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Web page: http://icf.som.yale.edu/
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Keywords: Banking; Capital Structure;

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