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Coordination Failure with Multiple-Source Lending, the Cost of Protection Against a Powerful Lender

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  • Franz Hubert
  • Dorothea Schäfer

Abstract

We analyze how a firm might protect quasirents in an environment of imperfect capital markets, where switching lenders is costly to the borrower, and contracts are incomplete. As switching costs make the firm vulnerable to ex post exploitation, it may want to diversify lending. Multiple-source lending, however, suffers from coordination failure. An uncoordinated withdrawal of funds will force a financially distressed firm into bankruptcy even though it could have been rescued if lenders had stayed firm. We show that the gains from preventing renegotiation do outweigh the cost of coordination failure if a single lender has sufficient bargaining power.

Suggested Citation

  • Franz Hubert & Dorothea Schäfer, 2002. "Coordination Failure with Multiple-Source Lending, the Cost of Protection Against a Powerful Lender," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 158(2), pages 256-256, June.
  • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200206)158:2_256:cfwmlt_2.0.tx_2-h
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    References listed on IDEAS

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    Cited by:

    1. Ralf Elsas & Frank Heinemann & Marcel Tyrell, 2004. "Multiple but Asymmetric Bank Financing: The Case of Relationship Lending," CESifo Working Paper Series 1251, CESifo Group Munich.
    2. Peter Ockenfels & Rosemarie Nagel & Frank Heinemann, 2002. "Speculative Attacks and Financial Architecture: Experimental Analysis of Coordination Games with Public and Private Information," FMG Discussion Papers dp416, Financial Markets Group.
    3. Bannier, Christina E., 2007. "Heterogeneous multiple bank financing: does it reduce inefficient credit-renegotation incidences?," Frankfurt School - Working Paper Series 83, Frankfurt School of Finance and Management.
    4. Luigi Guiso & Monica Paiella, 2008. "Risk Aversion, Wealth, and Background Risk," Journal of the European Economic Association, MIT Press, pages 1109-1150.
    5. Cenni, Stefano & Monferrà, Stefano & Salotti, Valentina & Sangiorgi, Marco & Torluccio, Giuseppe, 2015. "Credit rationing and relationship lending. Does firm size matter?," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 249-265.
    6. Luigi Guiso & Raoul Minetti, 2010. "The Structure of Multiple Credit Relationships: Evidence from U.S. Firms," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1037-1071, September.
    7. Kasahara, Tetsuya, 2009. "Coordination failure among multiple lenders and the role and effects of public policy," Journal of Financial Stability, Elsevier, pages 183-198.
    8. Idir Cherief & Camille Cornand, 2003. "Le traitement juridique de l’insolvabilité à l’échelle internationale : vers des procédures internationales de faillite des entreprises dans les pays émergents," Revue d'Économie Financière, Programme National Persée, vol. 72(3), pages 337-358.
    9. Schäfer, Dorothea, 2002. "Restructuring Know How and Collateral," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 572-597.
    10. Flavio Bazzana & Marco Palmieri, 2012. "How to increase the efficiency of bond covenants: a proposal for the Italian corporate market," European Journal of Law and Economics, Springer, pages 327-346.
    11. Manz, Michael, 2010. "Information-based contagion and the implications for financial fragility," European Economic Review, Elsevier, pages 900-910.
    12. Christina Bannier, 2007. "Heterogeneous multiple bank financing: does it reduce inefficient credit-renegotiation incidences?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, pages 445-470.

    More about this item

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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