Competition in Loan Contracts

Christine A. Parlour and Uday Rajan

American Economic Review, 2001, vol. 91, issue 5, 1311-1328

Abstract: We present a model of an unsecured loan market. Many lenders simultaneously offer loan contracts (a debt level and an interest rate) to a borrower. The borrower may accept more than one contract. Her payoff if she defaults increases in the total amount borrowed. If this payoff is high enough, deterministic zero-profit equilibria cannot be sustained. Lenders earn a positive profit, and may even charge the monopoly price. The positive-profit equilibria are robust to increases in the number of lenders. Despite the absence of asymmetric information, the competitive outcome does not obtain in the limit.

JEL-codes: G21 L13 (search for similar items in EconPapers)
Date: 2001
Note: DOI: 10.1257/aer.91.5.1311
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Citations: View citations in EconPapers (67)

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