Multiple lending and constrained efficiency in the credit market

This paper studies the relationship between competition and incentives in an economy with financial contracts. We concentrate on the credit market, where an entrepreneur can simultaneously accept more than one contractual offer. Several homogeneous lenders compete on the contracts they offer to finance the entrepreneur’s investment project. We model a common agency game with non-exclusive contracting and moral hazard, and we characterize its equilibria. As expected, notwithstanding the competition among the principals (lenders), non-competitive allocations emerge at equilibrium. In particular, positive profit equilibria are pervasive. We then provide a complete characterization of the constrained utility possibility set, and observe that all the equilibrium payoffs of the decentralized game belong to the frontier of the set. Hence, the equilibria of this common agency game with moral hazard are constrained Pareto efficient.