Abstract
A positive equilibrium price of size exists when size is a scarce productive resource. This paper articulates a costly-state-verification model of financial contracting with heterogeneous lender sizes. We find that in a non-rationing direct lending equilibrium, (1) Financial contract is nonlinear in that expected rates of return on loans increase with loan sizes; (2) Endogenous asset indivisibility arises; (3) The total social surplus under a nonlinear contract is less than that under a linear structure; (4) Average debt size affects the market value of a firm. We also extend analysis to the case of credit rationing and financial intermediation.
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