From Search to Match: When Loan Contracts Are Too Long

Chamley, Christophe and Rochon, Céline (2011) From Search to Match: When Loan Contracts Are Too Long. Journal of Money, Credit and Banking, 43 (s2). pp. 385-411.


A model of lending is presented where loans are established in matches between banks (lenders) and entrepreneurs (borrowers) who meet in a search process. Projects turn out randomly a quick payoff or a long‐term payoff that requires a rollover of the loan. The model generates, under proper parameter conditions, two steady states without or with rollover, and rollover is socially inefficient. Under imperfect information, the standard debt contract is privately efficient. However, it extends the domains of equilibria with socially inefficient rollover. The global dynamics displays a continuum of equilibrium paths that each exhibits sudden discontinuities—crises—in which the mass of outstanding loans is reduced by a quantum amount of terminations. Crises have a cleansing effect.

Item Type: Article
Keywords: Search; Debt contract; Asymmetric information; Debt overhang; Strategic complementarity; Multiple equilibria; finance
Subject(s): Finance
Date Deposited: 11 Mar 2012 18:35
Last Modified: 10 Dec 2018 09:49
Funders: N/A

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