Long Term Debt with Hidden Borrowing

Bar-Isaac, Heski; Cuñat, Vicente

doi:10.2139/ssrn.724023

Long Term Debt with Hidden Borrowing

NYU Stern Economics Working Paper No. EC-05-04

31 Pages Posted: 18 May 2005

See all articles by Heski Bar-Isaac

Heski Bar-Isaac

University of Toronto - Rotman School of Management

Vicente Cuñat

London School of Economics & Political Science (LSE) - Financial Markets Group

There are 2 versions of this paper

Date Written: March 7, 2005

Abstract

We consider borrowers with the opportunity to raise funds from a competitive banking sector that shares information about borrowers, and an alternative hidden lender. We highlight that the presence of the hidden lender restricts the contracts that can be obtained from the banking sector and that in equilibrium some borrowers obtain funds from both the banking sector and the (inefficient) hidden lender simultaneously. We further show that as the inefficiency of the hidden lender increases, total welfare decreases. By extending the model to examine a partially hidden lender, we further highlight the key role of information.

Keywords: Long term debt, hidden borrowing, debt contracts, adverse selection

JEL Classification: D82, D14, G21, D86

Suggested Citation: Suggested Citation

Bar-Isaac, Heski and Cuñat, Vicente, Long Term Debt with Hidden Borrowing (March 7, 2005). NYU Stern Economics Working Paper No. EC-05-04. Available at SSRN: https://ssrn.com/abstract=724023 or http://dx.doi.org/10.2139/ssrn.724023