Multiple Lenders, Strategic Default, and Covenants

Andrea Attar, Catherine Casamatta, Arnold Chassagnon and Jean-Paul Décamps

American Economic Journal: Microeconomics, 2019, vol. 11, issue 2, 98-130

Abstract: We study capital markets in which investors compete by designing financial contracts to control an entrepreneur's ability to side trade and default on multiple loans. We show that covenants may have anticompetitive effects: in particular, they prevent investors from providing additional funds and reduce the entrepreneur's investment capacity. As a result, a large number of inefficient allocations is supported at equilibrium. We propose a subsidy mechanism similar to guarantee funds in financial markets that efficiently controls the entrepreneur's side trading and sustains the competitive allocation as the unique equilibrium one.

JEL-codes: D21 D82 D86 G21 G32 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/mic.20170189
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Multiple Lenders, Strategic Default, and Covenants (2019)
Working Paper: Multiple Lenders, Strategic Default, and Covenants (2019)
Working Paper: Multiple Lenders, Strategic Default and Covenants (2016)
Working Paper: Multiple Lenders, Strategic Default and Covenants (2014)
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