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Competition in Loan Contracts

  • Christine A. Parlour
  • Uday Rajan
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    We present a model of an unsecured loan market. Many lenders simultaneously offer loan contracts (a debt level and an interest rate) to a borrower. The borrower may accept more than one contract. Her payoff if she defaults increases in the total amount borrowed. If this payoff is high enough, deterministic zero-profit equilibria cannot be sustained. Lenders earn a positive profit, and may even charge the monopoly price. The positive-profit equilibria are robust to increases in the number of lenders. Despite the absence of asymmetric information, the competitive outcome does not obtain in the limit.

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    Article provided by American Economic Association in its journal American Economic Review.

    Volume (Year): 91 (2001)
    Issue (Month): 5 (December)
    Pages: 1311-1328

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    Handle: RePEc:aea:aecrev:v:91:y:2001:i:5:p:1311-1328
    Note: DOI: 10.1257/aer.91.5.1311
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    14. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-52, March.
    15. Jaynes, Gerald David, 1978. "Equilibria in monopolistically competitive insurance markets," Journal of Economic Theory, Elsevier, vol. 19(2), pages 394-422, December.
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