 Pairwise credit and the initial cost of lendingNo 10-23, Working Papers from Federal Reserve Bank of Philadelphia Abstract: The author studies the terms of credit in a competitive market in which sellers are willing to repeatedly finance the purchases of buyers by extending direct credit. Lenders (sellers) can commit to deliver any long-term credit contract that does not result in a payoff that is lower than that associated with autarky, while borrowers (buyers) cannot commit to any contract. A borrower's ability to repay a loan is privately observable. As a result, the terms of credit within an enduring relationship change over time, according to the history of trades. Two borrowers are treated differently by the lenders with whom they are paired because they have had distinct repayment histories. Although there is free entry of lenders in the credit market, each lender has to pay a cost to contact a borrower. A lower cost makes each borrower better off from the perspective of the contracting date, results in less variability in a borrower's expected discounted utility, and makes each lender uniformly worse off ex post. As this cost becomes small, borrowers get nearly the same terms of credit within their credit relationships with lenders, regardless of individual repayment histories. Keywords: Credit; Loans (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:10-23 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC. |
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