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The role of long-term contracting in business lending
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| Edition: | Last updated: February 2, 2024 |
| Type of Resource: | E-Book |
| Language: | English |
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Bank of Canada: Staff working paper ; 2024, 2
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| Subjects: | |
| Source: | Verbunddaten SWB Lizenzfreie Online-Ressourcen |
| Summary: | This paper examines inefficiencies arising from a lack of long-term contracting in small business lending in China. I develop and estimate a dynamic model where firms repeatedly interact with the same lender. All loans are short-term. Collateral can be used to deter a strategic default by a firm, but the lender cannot recover the full value of the collateral in the case of a default. The endogenous contract terms-including interest rates, loan size and collateral-reflect a firm's probability of default in equilibrium. Learning drives the dynamics of contract terms because a firm's profitability type is unknown. Long-term contracts improve welfare mainly by mitigating the incentives for a firm to default. |
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| Physical Description: | 1 Online-Ressource (circa 71 Seiten); Illustrationen |
| DOI: | 10.34989/swp-2024-2 |