Monitoring and Default in Non-Exclusive Credit Markets
46 Pages Posted: 27 Feb 2007
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: Suggested Citation
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