Asymmetric Information, Bank Lending, and Implicit Contracts: The Winner's Curse

Abstract

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