Optimal Return in a Model of Bank Small-business Financing

Oana Peia and Radu Vranceanu

Working Papers from HAL

Abstract: This paper develops a simple model showing how banks can increase the access to finance of small, risky firms by mitigating coordination problems among investors. If investors observe a biased signal about the true implementation cost of real sector projects, the model can be solved for a switching equilibrium in the classical global games approach. We show that the socially optimal interest rate that maximizes the probability of success of the firm is higher than the risk-free rate. Yet if banks maximize investors' expected return, they would choose an interest higher than the socially optimal one. This gives rise to a form of credit rationing, which stems from the funding constraints of the banks.

Keywords: Bank finance; small business; global games; switching equilibrium; optimal return rium; optimal return (search for similar items in EconPapers)
Date: 2014-02-27
New Economics Papers: this item is included in nep-ban and nep-ppm
Note: View the original document on HAL open archive server: https://essec.hal.science/hal-00952641
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://essec.hal.science/hal-00952641/document (application/pdf)

Related works:
Working Paper: Optimal Return in a Model of Bank Small-business Financing (2014)
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:hal:wpaper:hal-00952641

Access Statistics for this paper

More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD ().