Debt contracts and collapse as competition phenomena |
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Authors: | Hans Gersbach Harald Uhlig |
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Affiliation: | aGrabengasse 14, University of Heidelberg, D-69117 Heidelberg, Germany;bHumboldt University, Berlin, Spandauer Straße 1, D-10178 Berlin, Germany;cCEPR |
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Abstract: | We study financial intermediation in which sufficient sorting is impossible. We identify a new type of market failure that may occur even when returns of investing entrepreneurs are verifiable. Moreover, we suggest that the nature of competition determines the contracts banks offer. A monopoly bank will offer equity contracts. In any pure strategy equilibrium when lenders compete à la Bertrand, however, only debt contracts are offered. |
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Keywords: | Contract design Debt contract Adverse selection Moral hazard Competition Regulation |
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