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Long Term Debt with Hidden BorrowingVicente CuñatLondon School of Economics & Political Science (LSE) - Financial Markets Group Heski Bar-IsaacRotman School of Management, University of Toronto; New York University - Leonard N. Stern School of Business - Department of Economics January 2005 UPF Economics and Business Working Paper 803 Abstract: 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 Scree working papers seriesDate posted: November 16, 2005Suggested CitationContact Information
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