Monitoring and Default in Non-Exclusive Credit Markets

46 Pages Posted: 27 Feb 2007

See all articles by Eloisa Campioni

Eloisa Campioni

University of Rome Tor Vergata - Dept. of Economics and Finance

Date Written: February 26, 2007

Abstract

This paper studies the relationship between competition and incentives in an economy with financial contracts. We concentrate on a credit market where an entrepreneur can simultaneously accept more than one contractual offer. Several homogeneous lenders compete on the contracts they offer to finance the entrepreneur's investment project. We model a common agency game with non-exclusive contracting and moral hazard, and characterize its equilibria. In the contract includes an investment amount, a repayment and a monitoring decision. As expected, notwithstanding the competition among the principals (lenders), non-competitive allocations emerge at equilibrium. In particular, positive profit equilibria are pervasive. We then characterize the constrained utility possibility set, and observe that for the special case when no-monitoring is allowed, all the equilibrium payoffs of the decentralized game are second-best efficient. Contractual externalities do not affect welfare. These equilibria correspond to those already analyzed in Parlour and Rajan (2001). When monitoring is available, competition is more intense. We show that there exists a profit equilibrium which is now second-best inefficient.

Keywords: common agency, non-exclusive financial contracting, competition and welfare

JEL Classification: D43, D62, G21

Suggested Citation

Campioni, Eloisa, Monitoring and Default in Non-Exclusive Credit Markets (February 26, 2007). Available at SSRN: https://ssrn.com/abstract=965716 or http://dx.doi.org/10.2139/ssrn.965716

Eloisa Campioni (Contact Author)

University of Rome Tor Vergata - Dept. of Economics and Finance ( email )

Italy