The Optimal Concentration of Creditors

33 Pages Posted: 27 Nov 2001

See all articles by Ivo Welch

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Arturo Bris

IMD International; European Corporate Governance Institute (ECGI); Yale University - International Center for Finance

Multiple version iconThere are 2 versions of this paper

Date Written: April 2004

Abstract

Our model assumes that creditors need to expend resources to collect on claims. Consequently, because diffuse creditors suffer from mutual free-riding (Holmstrom (1982)), they fare worse than concentrated creditors (e.g. a house bank). The model predicts that measures of debt concentration relate positively to creditors' (aggregate) debt collection expenditures and positively to management's chosen expenditures to resist paying. However, collection activity is purely redistributive, so social waste is larger when creditors are concentrated. If borrower quality is not known, the best firms choose the most concentrated creditors and pay higher expected yields.

Keywords: Banking, Capital Structure

JEL Classification: G2, G3

Suggested Citation

Welch, Ivo and Bris, Arturo, The Optimal Concentration of Creditors (April 2004). EFA 2002 Berlin Meetings Presented Paper; Yale ICF Working Paper No. 00-65; Cowles Foundation Discussion Paper No. 1338. Available at SSRN: https://ssrn.com/abstract=291419

Ivo Welch (Contact Author)

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National Bureau of Economic Research (NBER)

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Arturo Bris

IMD International ( email )

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Yale University - International Center for Finance ( email )

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