American Economic Review: Vol. 91 No. 5 (December 2001)


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Competition in Loan Contracts

Article Citation

Parlour, Christine A., and Uday Rajan. 2001. "Competition in Loan Contracts." American Economic Review, 91(5): 1311-1328.

DOI: 10.1257/aer.91.5.1311


We present a model of an unsecured loan market. Many lenders simultaneously offer loan contracts (a debt level and an interest rate) to a borrower. The borrower may accept more than one contract. Her payoff if she defaults increases in the total amount borrowed. If this payoff is high enough, deterministic zero-profit equilibria cannot be sustained. Lenders earn a positive profit, and may even charge the monopoly price. The positive-profit equilibria are robust to increases in the number of lenders. Despite the absence of asymmetric information, the competitive outcome does not obtain in the limit.

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Parlour, Christine A. (Carnegie Mellon U)
Rajan, Uday (Carnegie Mellon U)

JEL Classifications

G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
L13: Oligopoly and Other Imperfect Markets

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