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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26098

Title: "Long term debt with Hidden Borrowing"
Authors: Bar-Isaac, Heski
Cuñat, Vicente
Keywords: Long-term debt
hidden borrowing
debt contracts
adverse selection
Issue Date: Jan-2008
Series/Report no.: EC-05-04
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 allows borrowers to conceal poor results from their banks and, thus, restricts the contracts that can be obtained from the banking sector and reduces welfare. In equilibrium, some borrowers obtain funds from both the banking sector and the inefficient hidden lender simultaneously; cross-subsidies arise between different borrowers and this leads to too little liquidation. Imposing distributional assumptions, we fully characterize outcomes and 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.
URI: http://hdl.handle.net/2451/26098
Appears in Collections:Economics Working Papers

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