Long-Term Debt and Hidden Borrowing

Bar-Isaac, Heski; Cuñat, Vicente

doi:10.2139/ssrn.825905

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Long-Term Debt and Hidden Borrowing

38 Pages Posted: 25 Oct 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; The London School of Economics

There are 2 versions of this paper

Date Written: June 2005

Abstract

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

Bar-Isaac, Heski and Cuñat, Vicente and Cuñat, Vicente, Long-Term Debt and Hidden Borrowing (June 2005). Available at SSRN: https://ssrn.com/abstract=825905 or http://dx.doi.org/10.2139/ssrn.825905