Optimal Return in a Model of Bank Small-business Financing
Oana Peia and
Radu Vranceanu
No WP1403, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School
Abstract:
This paper develops a simple model showing how banks can increase the access to finance of small, risky firms by mitigating coordination problems among investors. If investors observe a biased signal about the true implementation cost of real sector projects, the model can be solved for a switching equilibrium in the classical global games approach. We show that the socially optimal interest rate that maximizes the probability of success of the firm is higher than the risk-free rate. Yet if banks maximize investors' expected return, they would choose an interest higher than the socially optimal one. This gives rise to a form of credit rationing, which stems from the funding constraints of the banks.
Keywords: Bank finance; Small business; Global games; Switching equilibrium; Optimal return rium; Optimal return (search for similar items in EconPapers)
JEL-codes: C72 D82 G21 G32 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2014-02
New Economics Papers: this item is included in nep-ban and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)
Downloads: (external link)
http://hal-essec.archives-ouvertes.fr/docs/00/95/26/41/PDF/WP1403.pdf (application/pdf)
Related works:
Working Paper: Optimal Return in a Model of Bank Small-business Financing (2014) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:ebg:essewp:dr-14003
Access Statistics for this paper
More papers in ESSEC Working Papers from ESSEC Research Center, ESSEC Business School ESSEC Research Center, BP 105, 95021 Cergy, France. Contact information at EDIRC.
Bibliographic data for series maintained by Sophie Magnanou (magnanou@essec.edu).