Competition in Loan Contracts
- 1 December 2001
- journal article
- Published by American Economic Association in American Economic Review
- Vol. 91 (5) , 1311-1328
- https://doi.org/10.1257/aer.91.5.1311
Abstract
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.Keywords
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