Optimal borrowing structure: An explanation for the multiplicity of large-share creditors and the differentiation among them

I explore the effects and optimum features of the borrowing structure in an incomplete contracting framework with a verification opportunity. In this framework, liquidation and verification, both of which are inefficient and consequently the objectives of renegotiation, are devices to implement repayments. While the number of creditors affects the outcomes in the liquidation-deterrence renegotiation, the share structure affects the creditors’ incentive for verification activity and consequently the outcomes in the verification-deterrence renegotiations. The optimal borrowing structure balances these effects. It is shown that borrowing structures with multiple differentiated large-share creditors can be optimal.