The design of bank loan contracts

  • Gorton G
  • Kahn J
  • 66


    Mendeley users who have this article in their library.
  • 47


    Citations of this article.


The unique characteristics of bank loans emerge endogenously to enhance efficiency in a model of renegotiation between a borrower and a lender in which there is the potential for moral hazard on each side of the relationship. Firm risk is endogenous and renegotiated interest rates on the debt need not be monotone in firm risk. The initial terms of the debt are not set to price default risk but rather are set to efficiently balance bargaining power in later renegotiation. Loan pricing may be nonlinear, involving initial transfers either from the borrower to the bank or from the bank to the borrower.

Get free article suggestions today

Mendeley saves you time finding and organizing research

Sign up here
Already have an account ?Sign in

Find this document

Get full text


  • Gary Gorton

  • James Kahn

Cite this document

Choose a citation style from the tabs below

Save time finding and organizing research with Mendeley

Sign up for free