Relying on the Information of Others: Debt Rescheduling with Multiple Lenders

Claude Fluet and Paolo Garella

No 232, Development Working Papers from Centro Studi Luca d'Agliano, University of Milano

Abstract: Can inertia in terminating unsuccessful loans (creditor passivity) be due to the multiplicity of lenders in loan arrangements? Can a lender reschedule, betting against his odds? Private information in the form of bad but coarse news, that would prompt foreclosure on its own, will instead lead to rescheduling. The gamble is that other lenders may have sharper information. At equilibrium, rescheduling occurs even if all lenders received bad news. This is ine¢ cient (increasing the cost of capital) compared to perfect information sharing. However, barren information sharing, at equilibrium there is no excess reliance on the information of others from a social point of view. The paper also contains an extension dealing with \" financial scandals\".

Keywords: Debt contracts; asymmetric information; rescheduling; in- solvency; Bayesian games. (search for similar items in EconPapers)
JEL-codes: D82 D86 G32 G33 (search for similar items in EconPapers)
Pages: 34
Date: 2007-11-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Relying on the Information of Others: Debt Rescheduling with Multiple Lenders (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:csl:devewp:232

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