'Long Term Debt with Hidden Borrowing'
41 Pages Posted: 13 Oct 2008
Date Written: January 2008
Abstract
We consider borrowers with the opportunity to raise funds from a competitive banking sector that shares information, and from an alternative hidden lender. The presence of the hidden lender allows borrowers to conceal poor results from their banks and, thus, restricts the contracts that can be obtained from the banking sector and reduces welfare. In equilibrium, some borrowers obtain funds from both the banking sector and the inefficient hidden lender simultaneously; cross-subsidies arise between different borrowers and this leads to too little liquidation. Imposing distributionalassumptions, we fully characterize outcomes and show that as the cost of borrowingfrom the hidden lender increases, total welfare increases. We generalize the model toallow for a partially hidden lender and obtain qualitatively similar results.
Keywords: Long-term debt, hidden borrowing, debt contracts, adverse selection
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Payday Lenders: Heroes or Villains?
By Adair Morse
-
Restricting Consumer Credit Access: Household Survey Evidence on Effects around the Oregon Rate Cap
-
Do Payday Loans Cause Bankruptcy?
By Paige Marta Skiba and Jeremy Tobacman
-
Payday Loans, Uncertainty and Discounting: Explaining Patterns of Borrowing, Repayment, and Default
By Paige Marta Skiba and Jeremy Tobacman
-
Information Disclosure, Cognitive Biases and Payday Borrowing
By Marianne Bertrand and Adair Morse
-
Information Disclosure, Cognitive Biases and Payday Borrowing
By Marianne Bertrand and Adair Morse
-
Payday Holiday: How Households Fare After Payday Credit Bans
-
What do High-Interest Borrowers do with Their Tax Rebate?
By Marianne Bertrand and Adair Morse