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Multiple Lending and Constrained Efficiency in the Credit Market

  • Attar Andrea

    ()

    (IDEI, Université de Toulouse I and Università di Roma, La Sapienza)

  • Campioni Eloisa

    ()

    (DPTEA, Luiss Guido Carli, Rome)

  • Piaser Gwenael

    ()

    (Università Ca’ Foscari di Venezia)

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 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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Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 6 (2006)
Issue (Month): 1 (October)
Pages: 1-35

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Handle: RePEc:bpj:bejtec:v:contributions.6:y:2006:i:1:n:7
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  1. Bisin, Alberto & Guaitoli, Danilo, 1998. "Moral Hazard and Non-Exclusive Contracts," CEPR Discussion Papers 1987, C.E.P.R. Discussion Papers.
  2. Repullo, Rafael & Suarez, Javier, 1999. "Entrepreneurial Moral Hazard and Bank Monitoring: A Model of the Credit Channel," CEPR Discussion Papers 2060, C.E.P.R. Discussion Papers.
  3. 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.
  4. Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. 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.
  6. Alberto Bisin & Piero Gottardi, 1998. "Competitive Equilibria with Asymmetric Information," Levine's Working Paper Archive 2062, David K. Levine.
  7. 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.
  8. Peters, Michael, 2001. "Common Agency and the Revelation Principle," Econometrica, Econometric Society, vol. 69(5), pages 1349-72, September.
  9. Michael Peters, 2000. "Negotiation and Take it or Leave it in Common Agency," Working Papers peters-00-02, University of Toronto, Department of Economics.
  10. Bizer, David S & DeMarzo, Peter M, 1992. "Sequential Banking," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 41-61, February.
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  12. Martimort, David & Stole, Lars, 1999. "Contractual Externalities and Common Agency Equilibria," IDEI Working Papers 110, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2003.
  13. Christine A. Parlour & Uday Rajan, 2001. "Competition in Loan Contracts," American Economic Review, American Economic Association, vol. 91(5), pages 1311-1328, December.
  14. Besanko, David & Kanatas, George, 1993. "Credit Market Equilibrium with Bank Monitoring and Moral Hazard," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 213-32.
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  16. 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.
  17. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, June.
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