Debt Rescheduling with Multiple Lenders: Relying on the Information of Others

Abstract

Can debt rescheduling decisions differ in multiple lenders’ versus a single lender loan? Do multiple lenders efficiently react to information? We show that the precision of information plays an essential role. Foreclosing by one lender is disruptive so that a lender can rationally wait for the decision of other lenders, rescheduling her loan, if she expects that other lenders receive more precise information. We develop a Bayesian game where signals of different precision are randomly distributed to lenders. Both, premature liquidation and excessive rescheduling are possible in equilibrium, according to the pattern of information. However this is a second-best outcome, given that private information cannot be optimally shared.

Keywords: Overlending, debt contracts, insolvency, illiquidity, liquidation, relationship lending, multiple lenders, Bayesian games

JEL Classification: G32, G33, D82, D86