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The structure of bank relationships, endogenous monitoring and loan rates

Carletti, Elena (2001) The structure of bank relationships, endogenous monitoring and loan rates. Discussion paper, 388. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Abstract

This paper investigates, in a simple model of overlapping moral hazard problems between banks and firms, how the number of bank relationships affect banks incentives to monitor their borrrowers and how, in turn, these decisions affect loan rates and firms choice between single and multiple relationships. The analysis shows that multiple lenders monitor less than a single lender. This is because they face duplication of effort and sharing of benefits in monitoring. However, as a consequence of diseconomies of scale in monitoring, multiple lenders do not necessarily require a higher loan rate. The firms choice between single and multiple relationships is not univocal, depending on the relative severity of bank moral hazard as compared to firm moral hazard.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2001 The Author
Library of Congress subject classification: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 388
Date Deposited: 28 Aug 2009 15:33
URL: http://eprints.lse.ac.uk/25064/

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