Long Term Debt with Hidden Borrowing
London School of Economics & Political Science (LSE) - Financial Markets Group; Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Universitat Pompeu Fabra - Research Centre in Financial Economics and Accounting (CREFC)
Rotman School of Management, University of Toronto; New York University - Leonard N. Stern School of Business - Department of Economics
UPF Economics and Business Working Paper 803
We consider borrowers with the opportunity to raise funds from a competitive baking sector, that shares information about borrowers, and an alternative hidden lender. We highlight that the presence of the hidden lender restricts the contracts that can be obtained from the banking sector and that in equilibrium some borrowers obtain funds from both the banking sector and the (inefficient) hidden lender simultaneously. We further show that as the inefficiency of the hidden lender increases, total welfare decreases. By extending the model to examine a partially hidden lender, we further highlight the key role of information.
Number of Pages in PDF File: 34
Keywords: G21, G33, D14
JEL Classification: Hidden Borrowing, Informal Lenders, Borrower Screeworking papers series
Date posted: November 16, 2005
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