Skip to Main content Skip to Navigation
Preprints, Working Papers, ...

Optimal Return in a Model of Bank Small-business Financing

Abstract : This paper develops a simple model showing how banks can increase the access to finance of small, risky firms by mitigating coordination problems among investors. If investors observe a biased signal about the true implementation cost of real sector projects, the model can be solved for a switching equilibrium in the classical global games approach. We show that the socially optimal interest rate that maximizes the probability of success of the firm is higher than the risk-free rate. Yet if banks maximize investors' expected return, they would choose an interest higher than the socially optimal one. This gives rise to a form of credit rationing, which stems from the funding constraints of the banks.
Document type :
Preprints, Working Papers, ...
Complete list of metadata

Cited literature [33 references]  Display  Hide  Download
Contributor : Régine Belliard Connect in order to contact the contributor
Submitted on : Thursday, February 27, 2014 - 11:36:21 AM
Last modification on : Friday, August 5, 2022 - 2:46:00 PM
Long-term archiving on: : Sunday, April 9, 2017 - 6:44:13 PM


Publisher files allowed on an open archive


  • HAL Id : hal-00952641, version 1


Oana Peia, Radu Vranceanu. Optimal Return in a Model of Bank Small-business Financing. 2014. ⟨hal-00952641⟩



Record views


Files downloads