From Search to Match: When Loan Contracts are Too Long

A model of lending is presented where loans are established according to privately effcient debt contracts between banks (lenders) and entrepreneurs (borrowers) who meet in a search payo that requires a rollover of the loan. There are two equilibrium steady states without or with rollover (which is socially inecient). In a reduced model, there is a continuum of dynamic equilibrium paths. Regular crises may occur in which the stock of loans is reduced by a quantum amount. Such crises may be more ecient that a path with no crisis.