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A dynamic model of unsecured credit

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  • Daniel, Sanches

Abstract

We study the terms of credit in a competitive market in which sellers (lenders) are willing to repeatedly finance the purchases of buyers (borrowers) by engaging in a credit relationship. The key frictions are: (i) the lender cannot observe the borrowerʼs ability to repay a loan; (ii) the borrower cannot commit to any long-term contract; (iii) it is costly for the lender to contact a borrower and to walk away from a contract; and (iv) transactions within each credit relationship are not publicly observable. The lenderʼs optimal contract has two key properties: delayed settlement and debt forgiveness. Finally, we study the impact of changes in the initial cost of lending on the contract terms.

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  • Daniel, Sanches, 2011. "A dynamic model of unsecured credit," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1941-1964, September.
  • Handle: RePEc:eee:jetheo:v:146:y:2011:i:5:p:1941-1964
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    Cited by:

    1. Jonathan Chiu & Mei Dong & Enchuan Shao, 2012. "On the Welfare Effects of Credit Arrangements," Staff Working Papers 12-43, Bank of Canada.
    2. Alin OPREANA & Simona VINEREAN, 2015. "Analysis of the Economic Research Context after the Outbreak of the Economic Crisis of 2007-2009," Expert Journal of Economics, Sprint Investify, vol. 3(1), pages 77-92.

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