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The design of bank loan contracts |
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| Authors: | Gorton G; Kahn J |
| Institution: | 1 Department of Finance, The Wharton School, University of Pennsylvania, Philadelphia, PA 19104-6367, USA 2 Federal Reserve Bank of New York, NY, USA z Corresponding author |
| Abstract: | The unique characteristics of bank loans emerge endogenouslyto enhance efficiency in a model of renegotiation between aborrower and a lender in which there is the potential for moralhazard on each side of the relationship. Firm risk is endogenousand renegotiated interest rates on the debt need not be monotonein firm risk. The initial terms of the debt are not set to pricedefault risk but rather are set to efficiently balance bargainingpower in later renegotiation. Loan pricing may be nonlinear,involving initial transfers either from the borrower to thebank or from the bank to the borrower. |
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