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Long-term debt and hidden borrowing

Heski Bar-Isaac () and Vicente Cuñat ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We consider borrowers with the opportunity to raise funds from a competitive banking sector that shares information, and from an alternative hidden lender. The presence of the hidden lender restricts the contracts that can be obtained from the banking sector. In equilibrium some borrowers obtain funds from both the banking sector and the inefficient hidden lender simultaneously. We further show that as the cost of borrowing from the hidden lender increases, total welfare increases. We generalize the model to allow for a partially hidden lender and obtain qualitatively similar results.

Keywords: Long term debt; Hidden borrowing; Debt contracts; Adverse selection (search for similar items in EconPapers)
JEL-codes: D14 D82 D86 G21 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2005-06
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http://eprints.lse.ac.uk/24661/ Open access version. (application/pdf)

Related works:
Journal Article: Long-Term Debt and Hidden Borrowing (2014) Downloads
Working Paper: Long-term Debt and Hidden Borrowing (2012) Downloads
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