This paper provides one more rationale for interlinking credit and tenancy contracts in the context of production loans. In an environment characterized by a heterogeneous labor pool and imperfect information, landlords will have an incentive to avail themselves of screening devices. By linking tenancy and credit contracts a screening device can be implemented. The equilibrium set of contracts is characterized by a variety of interest rates, some of which might be below the market interest rate; the interest rate-principal schedule is downward sloping, with higher ability tenants choosing larger principals at lower interest rates.
ASJC Scopus subject areas
- Economics and Econometrics