Financial contracts and strategic customer exclusion

Abstract

The paper studies an incentive contract in a monopolistic and duopolistic credit market where borrowers are different in risk. One lender is in an advantaged position with respect to the other due to past relations with the borrowers. The features of the equilibrium contract are investigated. It is shown that the equilibrium contract drastically changes between the monopolistic and the duopolistic situations and are sensitive to other parameters. In some cases, the superior lender strategically yields borrowers, especially the better ones to the opponent lender.