Product Market Imperfections and Loan Commitments

  • Author(s): VOJISLAV MAKSIMOVIC
  • Published: Apr 30, 2012
  • Pages: 1641-1653
  • DOI: 10.1111/j.1540-6261.1990.tb03733.x

ABSTRACT

I show in a model of competitive banks that the characteristics of loan contracts are affected by product market imperfections in the borrower's industry. A bank loan commitment increases the value of a borrower firm operating in an imperfectly competitive industry and thus dominates a simple loan even in the absence of risk sharing considerations and informational asymmetries between the borrower and the bank. While it is individually rational for a firm to obtain a loan commitment, all the firms in that industry taken together are made worse off by the existence of loan commitments.

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