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

Claude Fluet and Paolo Garella

Cahiers de recherche from CIRPEE

Abstract: Can inertia in terminating unsuccessful loans be due to the multiplicity of lenders in loan arrangements? Can a lender reschedule, betting against his odds? We show that fear of being last in a liquidation run prevents the aggregation of the lenders' information about the value of continuation. 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 inefficient (increasing the cost of capital) compared to perfect information sharing. However, from a social point of view, barren information sharing, the equilibrium does not exhibit excessive reliance on the information of others.

Keywords: Debt contracts; asymmetric information; rescheduling; bankruptcy; Bayesian games (search for similar items in EconPapers)
JEL-codes: G32 G33 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-ban
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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:lvl:lacicr:0716

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