Competitive Poaching in Unsecured Lending

Ricardo Serrano-Padial and Lukasz Drozd
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Lukasz Drozd: University of Pennsylvania

No 1046, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: The paper studies the effects of non-exclusivity of credit card contracts on the provision of insurance through the institution of personal bankruptcy. In our model, lenders can continually observe borrower's time-varying creditworthiness and provide credit to them by undercutting (poaching) the existing lender(s). Contracts are non-exclusive and, to rollover their debt, borrowers may accept multiple credit agreements to economize on the cost of credit. The main result of the paper, which holds for a broad range of parameter values, is that the level of insurance provided under bankruptcy is largely independent from borrowers' preferences and features a bang-bang property: Either too little insurance is provided or, generically, there is overinsurance (potentially severe). Comparing to the exclusivity regime, our results suggest that non-exclusivity regime is unambiguously inferior in terms of welfare. The key novel mechanism of the model is a strategic entry deterrence motive of lenders.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:1046

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