Loan Payment and Renegotiation: The Role of the Liquidation Value

Paliński A. (2018), Loan Payment and Renegotiation: The Role of the Liquidation Value, Argumenta Oeconomica, No 1 (40), pp. 225-252.

28 Pages Posted: 15 Sep 2013 Last revised: 20 May 2019

See all articles by Andrzej Paliński

Andrzej Paliński

AGH University of Science and Technology

Date Written: April 13, 2014

Abstract

This paper analyzes a model of bank loan repayment as a signalling game. The model has shown that under asymmetric information a borrower reaches for renegotiation and debt forgiveness to a greater extent than is required by the return of the project financed with loan. In the equilibrium the borrower pays the lesser of an amount equal to the liquidation value or the amount of payment specified in the credit agreement. To offset the impact of the renegotiation options, interest rate specified in the loan agreement should ex ante take into account the liquidation value of the borrower's assets. The paper also proposes an example of utilisation of our theoretical model and the Monte Carlo method to determine the loan interest rate for a commercial loan.

Keywords: bank, loan, credit, interest rate, liquidation value, game theory, Monte Carlo

JEL Classification: C72, D86, G17, G21, G33

Suggested Citation

Paliński, Andrzej, Loan Payment and Renegotiation: The Role of the Liquidation Value (April 13, 2014). Paliński A. (2018), Loan Payment and Renegotiation: The Role of the Liquidation Value, Argumenta Oeconomica, No 1 (40), pp. 225-252., Available at SSRN: https://ssrn.com/abstract=2325424 or http://dx.doi.org/10.2139/ssrn.2325424

Andrzej Paliński (Contact Author)

AGH University of Science and Technology ( email )

30 Mickiewicza Av.
Kraków, 30-059
Poland

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