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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/31546
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| Title: | Long-term Debt and Hidden Borrowing |
| Authors: | Bar-Isaac, Heski
Cuñat, Vicente |
| Keywords: | long-term debt
hidden borrowing
debt contracts
adverse selection |
| Issue Date: | 9-May-2012 |
| Abstract: | We consider borrowers with the opportunity to raise funds from a
competitive banking sector that shares information, as well as from
other hidden lenders. The presence of hidden lenders allows borrowers to
conceal poor results from their banks and, thus, restricts the contracts
that can be obtained from the banking sector. In equilibrium, borrowers
obtain funds from both the banking sector and ine¢ cient hidden
lenders simultaneously, so that different types of borrowers cannot be
distinguished by banks. This generates cross-subsidies between different
borrowers that are observationally equivalent to the banking sector. We
show that the cheaper the cost of hidden borrowing, the lower is welfare
and the lower is the variety of funding arrangements in the banking
sector. In particular, while high costs of hidden borrowing allow each
different (viable) type of borrower to access different terms from the
banking sector, as the cost of hidden borrowing falls, more and more
borrowers face identical terms up to the point where all borrowers who
access the banking sector (which may include inefficient ones) face
identical terms. We generalize the model to allow for partially-hidden
lenders and obtain qualitatively similar results. |
| URI: | http://hdl.handle.net/2451/31546 |
| Appears in Collections: | Economics Working Papers
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