Sequential Banking

David S Bizer and Peter DeMarzo

Journal of Political Economy, 1992, vol. 100, issue 1, 41-61

Abstract: The authors study environments in which agents may borrow sequentially from more than one leader. Although debt is prioritized, additional lending imposes an externality on prior debt because, with moral hazard, the probability of repayment of prior loans decreases. Equilibrium interest rates are higher than they would be if borrowers could commit to borrow from at most one bank. Even though the loan terms are less favorable than they would be under commitment, the indebtedness of borrowers is greater. Further, additional lending causes the probability of default to increase. The results apply to markets for consumer, corporate, and international debt. Copyright 1992 by University of Chicago Press.

Date: 1992
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