Bank’s skin-in-the-game and hold-up by illiquid firms: strategic bargaining, dynamic inconsistency and credit constraints

Pré-publication, Document de travail: The loan literature analyzes the hold-up problem from the bank monopolistic information perspective, but if only the firm can fully repay the bank, the loan relationship is actually a bilateral monopoly. Then, if a firm borrows short to finance a long-term project, non-cooperative bargaining occurs at loan renewal. If, regardless of the firm's second-period quality, the perfect equilibrium partition derived from this bargaining grants the bank less than the break-even condition, she declines to lend ex-ante. That is, expected hold-up by the firm induces credit constraints. If the firm gets more by defaulting than by borrowing from another bank, the initial bank cannot break even by filing for the firm bankruptcy; that is, the bank has a weak outside option. Then, even if this option is binding, the previous credit constraints result holds. Such hold-up by illiquid firms provides a new foundation for long-term lending to finance long-term projects.

Auteur(s)

Louis-Marie Harpedanne de Belleville

Date de publication
  • 2024
Mots-clés JEL
C72 D53 G21 G32 G33
Mots-clés
  • Hold-up
  • Credit constraints
  • Subgame perfection
  • Non-cooperative bargaining
  • Outside option principle
  • Perfect equilibrium partition
  • Strategic default
  • Liquidity
  • Long-term loan
  • Skin in the game
  • Unverifiability
  • Interest-bearing asset
  • Strategic bargaining
  • Bank
  • Firm
  • Loan relationship
Pages
  • 36 p.
Version
  • 1