TITLE:
The Impact of Bank Health on Coordination among Creditors
AUTHORS:
Kenta Toyofuku
KEYWORDS:
Coordination Failure; Heterogeneous Bank Financing; Global Game
JOURNAL NAME:
Theoretical Economics Letters,
Vol.3 No.2,
April
30,
2013
ABSTRACT:
We investigate how the health of a
relationship bank impacts upon coordination among creditors and how it affects
the firm’s behavior. We show that if the relationship bank is healthy,
creditors coordinate each other and the firm takes an efficient action but if
it becomes financially distressed, a coordination problem arises ex post and the inefficient liquidation of the firm’s projects may
occur. This coordination failure, in turn, increases the interest payments ex
ante so that the firm is more likely to choose an inefficient action.