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Bank's skin-in-the-game and hold-up by illiquid firms: strategic bargaining, dynamic inconsistency and credit constraints

Author

Listed:
  • Louis-Marie Harpedanne de Belleville

    (Banque de France - Banque de France - Banque de France, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

The loan literature analyzes the hold-up problem from the bank monopolistic information perspective, but if only the firm can fully repay the bank, the loan relationship is actually a bilateral monopoly. Then, if a firm borrows short to finance a long-term project, non-cooperative bargaining occurs at loan renewal. If, regardless of the firm's second-period quality, the perfect equilibrium partition derived from this bargaining grants the bank less than the break-even condition, she declines to lend ex-ante.That is, expected hold-up by the firm induces credit constraints. If the firm gets more by defaulting than by borrowing from another bank, the initial bank cannot break even by filing for the firm bankruptcy; that is, the bank has a weak outside option. Then, even if this option is binding, the previous credit constraints result holds. Such hold-up by illiquid firms provides a new foundation for long-term lending to finance long-term projects.

Suggested Citation

  • Louis-Marie Harpedanne de Belleville, 2024. "Bank's skin-in-the-game and hold-up by illiquid firms: strategic bargaining, dynamic inconsistency and credit constraints," Working Papers hal-04792104, HAL.
    • Handle: RePEc:hal:wpaper:hal-04792104
    Note: View the original document on HAL open archive server: https://hal.science/hal-04792104v1
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