A Dynamic Theory of Multiple Borrowing

70 Pages Posted: 16 Oct 2015 Last revised: 18 Dec 2019

See all articles by Daniel Green

Daniel Green

Harvard Business School

Ernest Liu

Princeton University

Date Written: December 10, 2019


Multiple borrowing—a borrower obtains overlapping loans from multiple lenders—is a common phenomenon in many credit markets. We build a highly tractable, dynamic model of multiple borrowing and show that, because overlapping creditors may impose default externalities on each other, expanding financial access by introducing more lenders may severely backfire. Capital allocation is distorted away from the most productive uses. Entrepreneurs choose inefficient endeavors with low returns-to-scale. These problems are exacerbated when investments become more pledgeable or when borrowers have access to more lenders, explaining why increased access to finance does not always improve outcomes.

Keywords: Commitment, Multiple Borrowing, Common Agency, Microfinance, Investment, Misallocation

JEL Classification: C73, D24, E22, G11, G21

Suggested Citation

Green, Daniel and Liu, Ernest, A Dynamic Theory of Multiple Borrowing (December 10, 2019). Available at SSRN: https://ssrn.com/abstract=2674232 or http://dx.doi.org/10.2139/ssrn.2674232

Daniel Green (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Ernest Liu

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

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