IDEAS home Printed from https://ideas.repec.org/a/bla/jpbect/v23y2021i5p958-984.html
   My bibliography  Save this article

Bargaining over loan contracts with signaling

Author

Listed:
  • Alexander Zimper
  • Mpoifeng Molefinyane

Abstract

This paper combines a sequential bargaining game between an enterprise and a fixed number of banks with a signaling game through which the enterprise reveals her project quality as well as her market‐speed on the lending market. We characterize subgame‐perfect Nash equilibrium loan contracts that are supported by separating perfect Bayesian equilibria in the signaling game. In contrast to existing models of lending markets, low‐quality investment projects might be rewarded with more favorable equilibrium loan contracts than high‐quality projects. Also in contrast to existing models, an increase in the competitive pressure between banks reduces the aggregate welfare in our model. The reason is that more favorable loan conditions come with a greater incentive for the ‘strong’ entrepreneur to distinguish herself from her ‘weak’ counterpart through socially wasteful signaling costs.

Suggested Citation

  • Alexander Zimper & Mpoifeng Molefinyane, 2021. "Bargaining over loan contracts with signaling," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(5), pages 958-984, October.
    • Handle: RePEc:bla:jpbect:v:23:y:2021:i:5:p:958-984
    DOI: 10.1111/jpet.12480
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jpet.12480
    Download Restriction: no
    File URL: https://libkey.io/10.1111/jpet.12480?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Allen N. Berger & Gregory F. Udell, 2002. "Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure," Economic Journal, Royal Economic Society, vol. 112(477), pages 32-53, February.
    2. Rubinstein, Ariel & Wolinsky, Asher, 1985. "Equilibrium in a Market with Sequential Bargaining," Econometrica, Econometric Society, vol. 53(5), pages 1133-1150, September.
    3. Dermine, J., 1986. "Deposit rates, credit rates and bank capital : The Klein-Monti Model Revisited," Journal of Banking & Finance, Elsevier, vol. 10(1), pages 99-114, March.
    4. Helmut Bester, 1988. "Bargaining, Search Costs and Equilibrium Price Distributions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(2), pages 201-214.
    5. Bester, Helmut, 1993. "Bargaining versus Price Competition in Markets with Quality Uncertainty," American Economic Review, American Economic Association, vol. 83(1), pages 278-288, March.
    6. Muthoo, Abhinay, 1993. "Sequential Bargaining and Competition," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(2), pages 353-363, April.
    7. Harhoff, Dietmar & Korting, Timm, 1998. "Lending relationships in Germany - Empirical evidence from survey data," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1317-1353, October.
    8. Arnoud W. A. Boot & Anjan V. Thakor, 2000. "Can Relationship Banking Survive Competition?," Journal of Finance, American Finance Association, vol. 55(2), pages 679-713, April.
    9. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, April.
    10. Shaked, Avner & Sutton, John, 1984. "Involuntary Unemployment as a Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 52(6), pages 1351-1364, November.
    11. Jean Tirole, 2006. "The Theory of Corporate Finance," Post-Print hal-00173191, HAL.
    12. José María Liberti & Mitchell A. Petersen, 2018. "Information: Hard and Soft," NBER Working Papers 25075, National Bureau of Economic Research, Inc.
    13. Harhoff, Dietmar & Körting, Timm, 1998. "Lending Relationships in Germany: Empirical Results from Survey Data," CEPR Discussion Papers 1917, C.E.P.R. Discussion Papers.
    14. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(3), pages 355-374.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rabah Amir & Myrna Wooders, 2021. "Introduction to the special issue on markets, policies, and economic design: Theory and experiments," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(5), pages 765-771, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Binmore, Ken & Osborne, Martin J. & Rubinstein, Ariel, 1992. "Noncooperative models of bargaining," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 1, chapter 7, pages 179-225, Elsevier.
    2. Cerqueiro, Geraldo & Degryse, Hans & Ongena, Steven, 2011. "Rules versus discretion in loan rate setting," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 503-529, October.
    3. Kano, Masaji & Uchida, Hirofumi & Udell, Gregory F. & Watanabe, Wako, 2011. "Information verifiability, bank organization, bank competition and bank-borrower relationships," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 935-954, April.
    4. Kirschenmann, K., 2010. "The Dynamics in Requested and Granted Loan Terms when Bank and Borrower Interact Repeatedly," Other publications TiSEM 300df022-4701-4773-a8b7-c, Tilburg University, School of Economics and Management.
    5. Norden, L., 2015. "The Role of Banks in SME Finance," ERIM Inaugural Address Series Research in Management EIA-2015-062-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam..
    6. Kirschenmann, K., 2010. "The Dynamics in Requested and Granted Loan Terms when Bank and Borrower Interact Repeatedly," Discussion Paper 2010-63, Tilburg University, Center for Economic Research.
    7. Masayo Shikimi, 2013. "Do firms benefit from multiple banking relationships? Evidence from small and medium- sized firms in Japan," International Economics and Economic Policy, Springer, vol. 10(1), pages 127-157, March.
    8. Kirschenmann, K., 2010. "The Dynamics in Requested and Granted Loan Terms when Bank and Borrower Interact Repeatedly," Other publications TiSEM 40d5005c-1626-4511-aa8a-f, Tilburg University, School of Economics and Management.
    9. Raskovich, Alexander, 2007. "Ordered bargaining," International Journal of Industrial Organization, Elsevier, vol. 25(5), pages 1126-1143, October.
    10. Udell, Gregory F., 2008. "What's in a relationship The case of commercial lending," Business Horizons, Elsevier, vol. 51(2), pages 93-103.
    11. Song, Zhuo-lin & Zhang, Xiao-mei, 2018. "Lending technology and credit risk under different types of loans to SMEs: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 43-69.
    12. Karlyn Mitchell & Douglas K. Pearce, 2004. "Which Loans are Relationship Loans? Evidence from the 1998 Survey of Small Business Finances," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 9(2), pages 1-36, Summer.
    13. Berger, Allen N. & Espinosa-Vega, Marco A. & Frame, W. Scott & Miller, Nathan H., 2011. "Why do borrowers pledge collateral? New empirical evidence on the role of asymmetric information," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 55-70, January.
    14. Sengupta, Rajdeep, 2007. "Foreign entry and bank competition," Journal of Financial Economics, Elsevier, vol. 84(2), pages 502-528, May.
    15. Doris Neuberger & Solvig Räthke, 2009. "Microenterprises and multiple bank relationships: The case of professionals," Small Business Economics, Springer, vol. 32(2), pages 207-229, February.
    16. Delgado, J. & Salas, V. & Saurina, J., 2007. "Joint size and ownership specialization in bank lending," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3563-3583, December.
    17. Paolo Emilio Mistrulli & Valerio Vacca & Gennaro Corbisiero & Silvia del Prete & Luciano Esposito & Marco Gallo & Mariano Graziano & Maurizio Lozzi & Vincenzo Maffione & Daniele Marangoni & Andrea Mig, 2011. "Mutual Guarantee Institutions (MGIs) and small business credit during the crisis," Questioni di Economia e Finanza (Occasional Papers) 105, Bank of Italy, Economic Research and International Relations Area.
    18. Uchida, Hirofumi & Udell, Gregory F. & Yamori, Nobuyoshi, 2012. "Loan officers and relationship lending to SMEs," Journal of Financial Intermediation, Elsevier, vol. 21(1), pages 97-122.
    19. Hans Degryse & Steven Ongena, 2005. "Distance, Lending Relationships, and Competition," Journal of Finance, American Finance Association, vol. 60(1), pages 231-266, February.
    20. Degryse, Hans & Ongena, Steven, 2007. "The impact of competition on bank orientation," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 399-424, July.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jpbect:v:23:y:2021:i:5:p:958-984. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/apettea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.