Credit Game Study between the Bank and the Enterprise in China

Xiao-hua Yu, Ling Zhang

Abstract


There exist both cooperation and competition between commercial banks and enterprises regarding to credit transactions. How to achieve mutual benefits and reduce credit risk has always been a major issue for China’s banking industry. This paper establishes a credit game model between the bank and the enterprise, trying to find out the root cause of credit risk and possible ways to improve the situation. The result shows that the information delivery in the market plays an important role in each player’s behavioral options and that the information asymmetry may lead to the agreement failure on credit loans and increase credit risk. With heavier punishment of dishonest behavior and repeated games, enterprises tend to be honest to obtain long-term benefits. At the end of the paper, a series of measures such as increasing punishment cost, creating a sound credit system, etc are suggested to avoid the adverse selection and reduce the moral risk.

Keywords


credit risk; credit game; information asymmetry; payoff

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