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Multiple Banking Relationships: Competition among "inside" Banks

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  • Baglioni Angelo

Abstract

Why firms apply for credit at several banks? The model presented here provides an answer, based on the customer relationships approach. A bank makes an initial investment in information production on a borrowing firm; such an investment must later be compensated: the firm has to share its profits (if any) with the bank. The bank may be able to impose this sharing, when the firm asks for the rollover of a short term loan, thanks to the informational advantage she has over other lenders; but this "informational rent" lowers the firm owner's incentives to exert effort. Therefore, the firm needs a way to minimize such a rent: this may be done by applying for credit at more than one bank, thus building up competition among "inside" (informed) banks. On the other hand, it is crucial that this competition does not drive the informational rent to zero: in such a case, no bank would be willing to lend. The alternative of a long term loan is also examined, showing that it creates some incentive distortion as well.

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Bibliographic Info

Article provided by Società editrice il Mulino in its journal Rivista italiana degli economisti.

Volume (Year): (2002)
Issue (Month): 2 ()
Pages: 165-196

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Handle: RePEc:mul:jqat1f:doi:10.1427/8531:y:2002:i:2:p:165-196

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Cited by:
  1. Sandro Brusco & Luca Colombo & Umberto Galmarini, 2010. "Local Governments Tax Autonomy, Lobbying, and Welfare," Department of Economics Working Papers, Stony Brook University, Department of Economics 10-01, Stony Brook University, Department of Economics.

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