Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297450 
Authors: 
Year of Publication: 
2024
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2024-2
Publisher: 
Bank of Canada, Ottawa
Abstract: 
This paper examines inefficiencies arising from a lack of long-term contracting in small business lending in China. I develop and estimate a dynamic model where firms repeatedly interact with the same lender. All loans are short-term. Collateral can be used to deter a strategic default by a firm, but the lender cannot recover the full value of the collateral in the case of a default. The endogenous contract terms-including interest rates, loan size and collateral-reflect a firm's probability of default in equilibrium. Learning drives the dynamics of contract terms because a firm's profitability type is unknown. Long-term contracts improve welfare mainly by mitigating the incentives for a firm to default.
Subjects: 
Financial Institutions
JEL: 
D83
D86
G21
L14
L26
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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