Network-Motivated Lending Decisions
RIETI Discussion Paper Series 15E057
54 Pages Posted: 11 Aug 2016 Last revised: 3 Nov 2021
Date Written: November 2, 2021
We demonstrate theoretically the presence of forbearance lending by profit-maximizing banks to influential buyers and sellers in a supply network. A dominant bank in the financial market internalizes the negative externality of an influential firm's exit. As a result, it may keep refinancing for a loss-making influential firm at an interest rate lower than the prime rate. This mechanism sheds new light on the discussion about bailouts offered to so-called zombie firms. We propose measures to gauge the extent of the externality of an influential seller, price influence coefficient, and that of an influential buyer, demand influence coefficient.
Keywords: supply network, influence coefficient, forbearance, bailout, zombie firms
JEL Classification: C55, D57, G21, G32, L13, L14
Suggested Citation: Suggested Citation