A BEJTE Contributions article.

Abstract

This paper studies the relationship between competition and incentives in an economy with financial contracts. We concentrate on non-exclusive credit relationships, those where an entrepreneur can simultaneously accept more than one contractual offer. Several homogeneous lenders compete on the contracts they offer to finance the entrepreneur's investment project. We model a common agency game with moral hazard, and characterize its equilibria. As expected, notwithstanding the competition among the principals (lenders), non-competitive outcomes can be supported. In particular, positive profit equilibria are pervasive. We then provide a complete welfare analysis and show that all equilibrium allocations turn out to be constrained Pareto efficient.

Submitted: August 29, 2005 · Accepted: September 28, 2006 · Published: October 20, 2006

Originally published in Contributions to Theoretical Economics.

Recommended Citation

Attar, Andrea; Campioni, Eloisa; and Piaser, Gwenael (2006) "Multiple Lending and Constrained Efficiency in the Credit Market," Contributions to Theoretical Economics: Vol. 6 : Iss. 1, Article 7.
Available at: http://www.bepress.com/bejte/contributions/vol6/iss1/art7