Competition in Loan Contracts
- (pp. 1311-1328)
AbstractWe 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.
Citation2001. "Competition in Loan Contracts." American Economic Review, 91(5): 1311-1328. DOI: 10.1257/aer.91.5.1311
- G21 Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L13 Oligopoly and Other Imperfect Markets