Bargaining with a Bank
62 Pages Posted: 29 May 2018 Last revised: 11 Jun 2018
Date Written: January 2018
This paper examines bargaining as a mechanism to resolve information problems. To guide the analysis, I develop a parsimonious model of a credit negotiation between a bank and firms with varying levels of impatience. In equilibrium, impatient firms accept the bank’s offer immediately, while patient firms wait and negotiate price adjustments. I test the empirical predictions using a hand-collected dataset on credit line negotiations. Firms signing the bank’s offer right away draw down their line of credit after origination and default more than late signers. Late signers negotiate price adjustments more frequently, and, consistent with the model, these adjustments predict better ex post performance.
Keywords: Credit lines, Contract terms, Bargaining, Screening
JEL Classification: G21, G32
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