Multiple Banking Relationships: Competition among "inside" Banks
AbstractWhy 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 InfoArticle provided by Società editrice il Mulino in its journal Rivista italiana degli economisti.
Volume (Year): (2002)
Issue (Month): 2 ()
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- 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.
- Sandro Brusco & Luca Colombo & Umberto Galmarini, 2010. "Local Governments Tax Autonomy, Lobbying, and Welfare," DISCE - Quaderni dell'Istituto di Economia e Finanza, UniversitÃ Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) ief0097, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
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