Clustered pricing in the corporate loan market: Theory and empirical evidence

Existing theories explaining security price clustering as well as clustering in the retail deposit and mortgage markets are incompatible with the clustering in the corporate loan market. We develop a new theoretical model that the attitude of the lender toward the uncertainty about the quality of the borrower leads to the clustering of spreads. Our empirical results support our theoretical model and we find that clustering increases with the degree of uncertainty between the lender and the borrower. In contrast, clustering is less likely when the uncertainty about the quality of the borrower has been reduced through repeated access and through prior interactions of the lender and the borrower

Efficient Probabilistic Fines Under Negative Externalities

We introduce a probabilistic fine scheme into a simple model of a public bad with negative externalities. As the fine scheme is probabilistic, an agent’s probability to be fined depends on its relative action level. This induces a counteracting positive externality into the model because the individual fine probability depends not only on own actions but also on the actions of other agents. In our analysis we derive conditions on the primitives of the model that guarantee the existence of an efficient equilibrium where the negative externality of the public bad is neutralised by the positive externality from the fine scheme. We also demonstrate that a fine scheme can always be designed in such a way that an efficient outcome is induced as a pure strategy equilibrium