The Influence of Large Creditors on Creditor Coordination

Abstract

This paper examines the influence of large creditors in determining the likelihood of debt defaults due to creditor coordination failure. We develop a model in which a large creditor and a group of small creditors independently decide, based on private signals of fundamentals, whether to foreclose on a loan. In the absence of common knowledge of fundamentals, the incidence of failure is uniquely determined. Comparative statics on the unique equilibrium provides simple characterization of the role of large creditors. Our results show that the smaller the large creditor is, the more vulnerable the debtor is to premature foreclosure. We also find that information of relatively high precision available to the large creditor reduces the probability of failure.