Debt contracts and collapse as competition phenomena

Hans Gersbach; Harald Uhlig

doi:10.1016/j.jfi.2005.12.001

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Journal of Financial Intermediation Vol. 15 No. 4 2006

Debt contracts and collapse as competition phenomena

Hans Gersbach^1,2; Harald Uhlig^3,2

¹ Heidelberg University · ² Center for Economic and Policy Research · ³ Humboldt-Universität zu Berlin

Abstract

We study financial intermediation in which sufficient sorting is impossible. We identify a new type of market failure that may occur even when returns of investing entrepreneurs are verifiable. Moreover, we suggest that the nature of competition determines the contracts banks offer. A monopoly bank will offer equity contracts. In any pure strategy equilibrium when lenders compete à la Bertrand, however, only debt contracts are offered.

DOI: 10.1016/j.jfi.2005.12.001
Volume: 15
Issue: 4
Pages: 556-574
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Debt contracts and collapse as competition phenomena

Abstract

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