Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/155104
Authors: 
Moretto, Michele
Tamborini, Roberto
Year of Publication: 
2000
Series/Report no.: 
Nota di Lavoro, Fondazione Eni Enrico Mattei 50. 2000
Abstract: 
Our interest here concerns liquidity supply as a distinctive feature of the bank-borrower relationship. Any agent facing an opportunity or a commitment may find him/herself unexpectedly illiquid, and hence he/she may find it profitable to borrow "on call" if this costs less than missing the opportunity or defaulting on the commitment, or costs less than using non-money goods as means of payment. This is the essence of what Hicks called "the overdraft economy". Accordingly, we call a debt contract inclusive of the liquidity service an "overdraft debt contract", and we investigate its efficiency properties in a continuous time stochastic model of a repeated bank-borrower relationship where the key problem is the credibility of their mutual commitment between the two parties. Our main finding is that efficient, i.e. cost-minimising, overdraft debt contracts emerge in the absence of perfect commitment and enforceability as the borrower and the bank can exert mutual threat of termination.
Document Type: 
Working Paper

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