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A dynamic model of unsecured credit

  • Daniel, Sanches

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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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 146 (2011)
Issue (Month): 5 (September)
Pages: 1941-1964

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Handle: RePEc:eee:jetheo:v:146:y:2011:i:5:p:1941-1964
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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