Asymmetric Information, Bank Lending, and Implicit Contracts: The Winner's Curse
Financial Research Letters 1, 2004, 11-23
18 Pages Posted: 16 Apr 2020
Date Written: April 2004
The purpose of this note is to point out an omission in an important paper by Sharpe (1990) on long-term bank-firm relationships and to provide a correct analysis of the problem. The model studies repeated lending under asymmetric information which leads to winner's-curse type distortions of competition. Contrary to the claims in Sharpe (1990), this game only has an equilibriuim in mixed strategies, which features a partial informational lock-in by firms and random termination of lending relationships.
Keywords: Banking relationships, competition under asymmetric information, informational lock-in, auctions
JEL Classification: D43, D44, D82, G21, G30
Suggested Citation: Suggested Citation