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Long-term Debt and Hidden Borrowing

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  • Heski Bar-Isaac
  • Vicente Cuñat

Abstract

We consider borrowers with the opportunity to raise funds from a competitive banking sector that shares information, and from an alternative hidden lender. The presence of the hidden lender restricts the contracts that can be obtained from the banking sector. In equilibrium some borrowers obtain funds from both the banking sector and the inefficient hidden lender simultaneously. We further show that as the cost of borrowing from the hidden lender increases, total welfare increases. We generalize the model to allow for a partially hidden lender and obtain qualitatively similar results.
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  • Heski Bar-Isaac & Vicente Cuñat, 2012. "Long-term Debt and Hidden Borrowing," Working Papers 12-05, New York University, Leonard N. Stern School of Business, Department of Economics.
    • Handle: RePEc:ste:nystbu:12-05
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    References listed on IDEAS

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    Cited by:

    1. Heski Bar-Isaac & Vicente Cuñat, 2014. "Long-Term Debt and Hidden Borrowing," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 3(1-2), pages 87-122.
    2. Alberto Bennardo & Marco Pagano & Salvatore Piccolo, 2015. "Multiple Bank Lending, Creditor Rights, and Information Sharing," Review of Finance, European Finance Association, vol. 19(2), pages 519-570.

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    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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