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From Search to Match: When Loan Contracts Are Too Long

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  • CHRISTOPHE CHAMLEY
  • CÉLINE ROCHON

Abstract

A model of lending is presented where loans are established in matches between banks (lenders) and entrepreneurs (borrowers) who meet in a search process. Projects turn out randomly a quick payoff or a long‐term payoff that requires a rollover of the loan. The model generates, under proper parameter conditions, two steady states without or with rollover, and rollover is socially inefficient. Under imperfect information, the standard debt contract is privately efficient. However, it extends the domains of equilibria with socially inefficient rollover. The global dynamics displays a continuum of equilibrium paths that each exhibits sudden discontinuities—crises—in which the mass of outstanding loans is reduced by a quantum amount of terminations. Crises have a cleansing effect.

Suggested Citation

  • Christophe Chamley & Céline Rochon, 2011. "From Search to Match: When Loan Contracts Are Too Long," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 385-411, October.
    • Handle: RePEc:wly:jmoncb:v:43:y:2011:i:s2:p:385-411
    DOI: 10.1111/j.1538-4616.2011.00442.x
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    References listed on IDEAS

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