Long-Term Debt and Hidden Borrowing
38 Pages Posted: 25 Oct 2005
Date Written: June 2005
We consider borrowers with the opportunity to raise funds from a competitive banking sector that shares information, and from an alternative hidden lender. The presence of the hidden lender restricts the contracts that can be obtained from the banking sector. In equilibrium some borrowers obtain funds from both the banking sector and the inefficient hidden lender simultaneously. We further show that as the cost of borrowing from the hidden lender increases, total welfare increases. We generalize the model to allow for a partially hidden lender and obtain qualitatively similar results.
Keywords: Long term debt, hidden borrowing, debt contracts, adverse selection
JEL Classification: D82, D14, G21, D86
Suggested Citation: Suggested Citation