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Optimal Return in a Model of Bank Small-business Financing

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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.
Nous étudions le financement des PME par les banques dans un modèle de type "global games". Il apparait que le taux d'intérêt d'équilibre dans une économie décentralisée avec secteur bancaire concurrentiel est supérieur au taux d'intérêt qui assure le plus grand taux de réussite des projets.
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Dates and versions

hal-00952641 , version 1 (27-02-2014)

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  • HAL Id : hal-00952641 , version 1

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