The incentive effects of the overlapping project structure in credit markets

: Niinimäki Juha-Pekka

Publisher: Elsevier

: 2024

: Journal of Economics and Business

: 106159

: 128

: 0148-6195

: 1879-1735

DOI: https://doi.org/10.1016/j.jeconbus.2024.106159

: https://doi.org/10.1016/j.jeconbus.2024.106159

: https://research.utu.fi/converis/portal/detail/Publication/387262642

In this theoretical paper, we examine the risk-shifting problem between lenders and a firm running projects in two different environments. In a synchronous environment, the firm introduces two new 2-period projects that both begin and end on the same date and hence have a new start date in odd-numbered periods. In an asynchronous environment, the firm introduces one new 2-period project in every period: This process creates an overlapping structure for the projects. We show that the set of parameters that allow for reputation-supported lending is larger if projects are asynchronous rather than synchronous. The findings can be generalized to other forms of moral hazard.

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