Paper #803

Title:

Long term debt with hidden borrowing

Authors:

Heski Bar-Isaac and Vicente Cuñat

Date:

January 2005

Abstract:

We consider borrowers with the opportunity to raise funds from a competitive baking sector, that shares information about borrowers, and an alternative hidden lender. We highlight that the presence of the hidden lender restricts the contracts that can be obtained from the banking sector and that in equilibrium some borrowers obtain funds from both the banking sector and the (inefficient) hidden lender simultaneously. We further show that as the inefficiency of the hidden lender increases, total welfare decreases. By extending the model to examine a partially hidden lender, we further highlight the key role of information.

Keywords:

Hidden Borrowing, Informal Lenders, Borrower Screening, Long Term Debt

JEL codes:

G21, G33, D14

Area of Research:

Business Economics and Industrial Organization

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