Private Renegotiations and Government Interventions in Credit Chains

Vincent Glode, Christian C and Gregor Matvos

The Review of Financial Studies, 2023, vol. 36, issue 11, 4502-4545

Abstract: We propose a model of strategic renegotiation in which businesses are sequentially interconnected through their liabilities. This financing structure, which we refer to as a credit chain, gives rise to externalities, as each lender’s willingness to provide concessions to its borrower depends on how this lender’s own liabilities are expected to be renegotiated. We highlight how government interventions aimed at preventing default waves should account for private renegotiation incentives and interlinkages. In particular, we contrast the consequences of targeted subsidy and debt reduction programs following economic shocks, such as pandemics and financial crises.

JEL-codes: G21 G32 G33 G38 (search for similar items in EconPapers)
Date: 2023
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