The relationship banking paradox: No pain no gain versus raison d'être
AbstractRelationship banking paradox refers to the case that credit market competition may threaten relationship banking practice, but it may stimulate it as well because of differentiation. Using a mixed model of adverse selection and double moral hazard, this paper shows that for some parameter values, relationship banking arises even when the banks compete à la Bertrand, hence supporting the no pain no gain hypothesis. This is due to multilayer nature of the information asymmetry by double moral hazard where an outside bank that does not have the borrower's proprietary information is unable to exert optimal levels of effort in the continuation game.
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Bibliographic InfoArticle provided by Elsevier in its journal Economic Modelling.
Volume (Year): 28 (2011)
Issue (Month): 5 (September)
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Web page: http://www.elsevier.com/locate/inca/30411
Relationship banking Adverse selection Moral hazard;
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