From Search to Match: When Loan Contracts Are Too Long

Christophe Chamley () and Céline Rochon
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Christophe Chamley: PSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Department of Economics - BU - Boston University [Boston]
Céline Rochon: Saïd Business School - University of Oxford

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Abstract: A model of lending is presented where loans are established in matches between banks (lenders) and entrepreneurs (borrowers) who meet in a search process. Projects turn out randomly a quick payoff or a long-term payoff that requires a rollover of the loan. The model generates, under proper parameter conditions, two steady states without or with rollover, and rollover is socially inefficient. Under imperfect information, the standard debt contract is privately efficient. However, it extends the domains of equilibria with socially inefficient rollover. The global dynamics displays a continuum of equilibrium paths that each exhibits sudden discontinuities--crises--in which the mass of outstanding loans is reduced by a quantum amount of terminations. Crises have a cleansing effect.

Keywords: Search; Debt contract; Asymmetric information; Debt overhang; Strategic complementarity; Multiple equilibria (search for similar items in EconPapers)
Date: 2011-10
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Citations: View citations in EconPapers (16)

Published in Journal of Money, Credit and Banking, 2011, 43 (s2), pp.385-411. ⟨10.1111/j.1538-4616.2011.00442.x⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00754511

DOI: 10.1111/j.1538-4616.2011.00442.x

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