We would like to thank seminar participants at the Cleveland Fed, the Max Planck Institute for Research on Collective Goods in Bonn, FEMES 2009 in Tokyo, EEA-ESEM 2009 in Barcelona, ESWC 2010 in Shanghai, the Said Business School, and the Institute for Advanced Studies in Vienna. A. Rampini made suggestions that were critical (in both senses) at the various stages of writing.
From Search to Match: When Loan Contracts Are Too Long
Version of Record online: 23 SEP 2011
© 2011 The Ohio State University
Journal of Money, Credit and Banking
Volume 43, Issue Supplement s2, pages 385–411, October 2011
How to Cite
CHAMLEY, C. and ROCHON, C. (2011), From Search to Match: When Loan Contracts Are Too Long. Journal of Money, Credit and Banking, 43: 385–411. doi: 10.1111/j.1538-4616.2011.00442.x
- Issue online: 23 SEP 2011
- Version of Record online: 23 SEP 2011
- Received December 29, 2009; and accepted in revised form August 10, 2010.
- debt contract;
- asymmetric information;
- debt overhang;
- strategic complementarity;
- multiple equilibria
A model of lending is presented where loans are established in matches between banks (lenders) and entrepreneurs (borrowers) who meet in a search process. Projects turn out randomly a quick payoff or a long-term payoff that requires a rollover of the loan. The model generates, under proper parameter conditions, two steady states without or with rollover, and rollover is socially inefficient. Under imperfect information, the standard debt contract is privately efficient. However, it extends the domains of equilibria with socially inefficient rollover. The global dynamics displays a continuum of equilibrium paths that each exhibits sudden discontinuities—crises—in which the mass of outstanding loans is reduced by a quantum amount of terminations. Crises have a cleansing effect.