From search to match: when loan contracts are too long

A model of lending is presented where loans are established in matches between banks (lenders) and entrepreneurs (borrowers) who meet in a search process. Projects turn out randomly a quick payoff or a long-term payoff that requires a rollover of the loan. The model generates, under proper parameter conditions, two steady states without or with rollover, and rollover is socially inefficient. Under imperfect information, the standard debt contract with commitment is privately efficient. However, it extends the domains of equilibria with socially inefficient rollover. The absence of commitment abolishes the social inefficiency of the debt contract3.