Equilibrium Leasing Contracts Under Double-Sided Asymmetric Information

41 Pages Posted: 29 Jun 2000

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

An Yan

Fordham University - Gabelli School of Business

Date Written: March 2000

Abstract

We develop a non-tax rationale for leasing in a double-sided asymmetric information setting, and analyze how various contractual provisions in leasing contracts arise in equilibrium. In our model, a manufacturer of capital goods has private information about their quality; entrepreneurs (users of these capital goods) come to learn this quality only over a period of time. Each unit of the capital goods requires a certain level of maintenance in each period. Entrepreneurs differ in their cost of providing this maintenance; this maintenance cost is information private to each entrepreneur. Leasing emerges as an equilibrium solution to this double-sided adverse selection problem. Various contractual provisions in leasing contracts (e.g., short-term versus long-term leases with non-cancellation provisions, option to buy at lease termination, and service leases) also emerge as equilibrium solutions under alternative settings. Leases with metering provisions emerge in equilibrium when, in addition to maintenance cost, entrepreneurs differ in other dimensions such as their intensity of using the capital good, and their degree of risk aversion. Our model has implications for the lease versus sell decision, the situations under which various leasing contract provisions are appropriate, and for the relative magnitudes of sales prices and the leasing costs for leases with different contractual provisions.

JEL Classification: G3, L1

Suggested Citation

Chemmanur, Thomas J. and Yan, An, Equilibrium Leasing Contracts Under Double-Sided Asymmetric Information (March 2000). Available at SSRN: https://ssrn.com/abstract=223731 or http://dx.doi.org/10.2139/ssrn.223731

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

An Yan (Contact Author)

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States
212-636-7401 (Phone)
212-765-5573 (Fax)

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