Lenders Collaboration to Compete
24 Pages Posted: 27 Jan 2001
We present a two-period model within an incomplete information setting,where competitive and cooperative features of different lenders are shown. First, a pair of lenders must agree to compete for two firms' projects against other fund providers. Second, there is a competition for the financing of the firms between pairs of lenders. Our main result shows in a wide number of scenarios that it is optimal for lenders to enter in cooperative agreements to share junior liquidation rights along with senior rights on project returns. This fact has implications in the relationship between banks as well as that between other financiers like venture capitalists, where a strict individual competition to provide funds can lead to an underinvestment situation.
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