Corporate financing under moral hazard and the default risk of buyers

Péter Csóka, Dániel Havran () and Nóra Szűcs

Central European Journal of Operations Research, 2015, vol. 23, issue 4, 763-778

Abstract: We extend the theoretical model of external corporate financing to the case when the buyers of the borrowing firm may default during the financing period. In our setup there is an asymmetric information and hence moral hazard between the lender and the borrower concerning the efforts of the borrower. We define the optimal debt contract in two cases. In the symmetric case the lender and the borrower has the same information about the buyer, its probability of default. In the asymmetric case the borrower learns whether the buyer will pay or not before choosing her level of efforts. We prove that in the asymmetric case the borrowing capacity and the welfare of the society is weakly smaller than in the symmetric case. We also show that the nonnegative default risk of a buyer weakly decreases borrowing capacity compared to the case when the buyer pays for sure. However, it turns out that having a risky buyer might increase borrowing capacity and welfare. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Game theory; Moral hazard; Corporate financing; Trade credit (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://hdl.handle.net/10.1007/s10100-013-0319-2 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Corporate financing under moral hazard and the default risk of buyers (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:cejnor:v:23:y:2015:i:4:p:763-778

Ordering information: This journal article can be ordered from
http://www.springer. ... search/journal/10100

DOI: 10.1007/s10100-013-0319-2

Access Statistics for this article

Central European Journal of Operations Research is currently edited by Ulrike Leopold-Wildburger

More articles in Central European Journal of Operations Research from Springer, Slovak Society for Operations Research, Hungarian Operational Research Society, Czech Society for Operations Research, Österr. Gesellschaft für Operations Research (ÖGOR), Slovenian Society Informatika - Section for Operational Research, Croatian Operational Research Society
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().