Long-Term Debt and Hidden Borrowing
33 Pages Posted: 12 May 2012
There are 2 versions of this paper
Date Written: May 2012
Abstract
We consider borrowers with the opportunity to raise funds from a competitive banking sector that shares information, as well as from other hidden lenders. The presence of hidden lenders allows borrowers to conceal poor results from their banks and, thus, restricts the contracts that can be obtained from the banking sector. In equilibrium, borrowers obtain funds from both the banking sector and ine¢ cient hidden lenders simultaneously, so that different types of borrowers cannot be distinguished by banks. This generates cross-subsidies between different borrowers that are observationally equivalent to the banking sector. We show that the cheaper the cost of hidden borrowing, the lower is welfare and the lower is the variety of funding arrangements in the banking sector. In particular, while high costs of hidden borrowing allow each different (viable) type of borrower to access different terms from the banking sector, as the cost of hidden borrowing falls, more and more borrowers face identical terms up to the point where all borrowers who access the banking sector (which may include inefficient ones) face identical terms. We generalize the model to allow for partially-hidden lenders 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
-
Information Sharing in Credit Markets: International Evidence
By Tullio Jappelli and Marco Pagano
-
Information Sharing, Lending and Defaults: Cross-Country Evidence
By Tullio Jappelli and Marco Pagano
-
Sharing Default Information as a Borrower Discipline Device
By Jorge Padilla and Marco Pagano
-
Credit Reporting and Financing Constraints
By Inessa Love and Nataliya Mylenko
-
Information Sharing and Credit: Firm-Level Evidence from Transition Countries
By Martin Brown, Tullio Jappelli, ...
-
Information Sharing and Credit: Firm-Level Evidence from Transition Countries
By Martin Brown, Tullio Jappelli, ...
-
By Andrew Powell, Nataliya Mylenko, ...
-
By Christine A. Parlour and Uday Rajan
-
Credit Reporting, Relationship Banking, and Loan Repayment
By Martin Brown and Christian Zehnder
-
Softening Competition by Inducing Switching in Credit Markets
By Hans Degryse and Jan Bouckaert