Product Market Imperfections and Loan Commitments

Authors

  • VOJISLAV MAKSIMOVIC

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    • The University of British Columbia, Faculty of Commerce and Business Administration. The results of this paper are based on Section III. 2 of my Ph.D. Thesis. I would like to thank the members of my committee, Carliss Baldwin, Richard Caves, and Jerry Green; also Sugato Bhattacharyya, Rob Heinkel, David Kreps, Zhu Liu, Eli Talmor, Anjan Thakor, and an anonymous referee for their comments. The usual disclaimer applies.


ABSTRACT

I show in a model of competitive banks that the characteristics of loan contracts are affected by product market imperfections in the borrower's industry. A bank loan commitment increases the value of a borrower firm operating in an imperfectly competitive industry and thus dominates a simple loan even in the absence of risk sharing considerations and informational asymmetries between the borrower and the bank. While it is individually rational for a firm to obtain a loan commitment, all the firms in that industry taken together are made worse off by the existence of loan commitments.

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