Intermediary financing without commitment

Yunzhi Hu and Felipe Varas

Journal of Financial Economics, 2025, vol. 167, issue C

Abstract: Intermediaries reduce agency problems through monitoring, but credible monitoring requires sufficient retention until the loan matures. We study credit markets when intermediaries cannot commit to retention. Two structures are examined: investors lending alongside an all-equity bank and investors lending through the bank via short-term debt. With a commitment to retention, they are equivalent. Without commitment, the all-equity bank sells loans and reduces monitoring over time. Short-term debt encourages the intermediary to retain loans and incentivizes monitoring. Our analysis provides a novel mechanism for intermediaries’ reliance on short-term debt—the constant repricing of debt creates incentives that resolve the commitment problem in loan retention and monitoring.

Keywords: Commitment; Durable-goods monopoly; Financial intermediaries; Monitoring; Dynamic games; Optimal control in stratified domains (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:167:y:2025:i:c:s0304405x25000339

DOI: 10.1016/j.jfineco.2025.104025

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