Financing Repeat Borrowers: Designing Credible Incentives for Today and Tomorrow

Anil K. Jain
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Anil K. Jain: https://www.federalreserve.gov/econres/anil-k-jain.htm

No 1364, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We analyze relational contracts between a lender and borrower when borrower cash flows are not contractible and the costs of intermediation vary over time. Because lenders provide repayment incentives to borrowers through the continuation value of the lending relationship, borrowers will condition loan repayment on the likelihood of receiving loans in the future. Therefore, the borrower's beliefs about the lender's future liquidity and profitability become an important component of the borrower's repayment decision. Consequently, the possibility of high lending costs in the future weakens repayment incentives and can cause the borrower to strategically default in some states and an inefficient under-provision of credit. We characterize the optimal relational contract and discuss the application of our model to the case of microfinance and trade credit.

Keywords: trade credit; dynamic incentives; relationship lending; microfinance; repeated games (search for similar items in EconPapers)
JEL-codes: G21 G33 O16 (search for similar items in EconPapers)
Date: 2022-12
New Economics Papers: this item is included in nep-cfn, nep-des, nep-gth and nep-mfd
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1364

DOI: 10.17016/IFDP.2022.1364

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