Lending with costly enforcement of repayment and potential fraud

Research output: Contribution to journalArticlepeer-review

10 Scopus citations

Abstract

If penalizing a borrower in default is costly to lenders, Pareto-improving loans may be dynamically inconsistent not because there is no sufficiently harsh penalty for default, but because the lender has no incentive to implement the penalty if default occurs. Infinitely-lived institutions repeatedly intermediating between lenders and borrowers, called banks, can enforce contracts that individual lenders cannot, but to do so they must earn strictly positive profits. Maintaining the value of bank equity can also provide an incentive for bank owners not to use deposits fraudulently.

Original languageEnglish (US)
Pages (from-to)281-293
Number of pages13
JournalJournal of Banking and Finance
Volume10
Issue number2
DOIs
StatePublished - Jun 1986

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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