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Safety Nets Within Banks

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  • Felgenhauer, Mike
  • Grüner, Hans Peter
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    Abstract

    We study how banks should protect their credit departments against the external influence from potential borrowers. We analyze four mechanisms that are widespread in practice: a credit board with unanimity or simple majority, a hierarchy and an advisory system. A bank faces a trade-off between the quality of information aggregation and the effectiveness of barriers against external influence. We provide a ranking of the different schemes. Some of them are equivalent even though the credit managers' decision power differs. In large credit decisions, banks should sacrifice on the quality of information aggregation in order to better protect the decision making process from outside influence.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6317.

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    Date of creation: May 2007
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    Handle: RePEc:cpr:ceprdp:6317

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    Keywords: hierarchies; lobbying; voting rules;

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    1. Doyoung Kim & Jacques Lawarree & Dongsoo Shin, 2004. "Exit Option in Hierarchical Agency," Econometric Society 2004 North American Winter Meetings 269, Econometric Society.
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    6. Olsen, T.E. & Torsvik, G., 1998. "Collusion and Renegotiation in Hierarchies: A Case of Beneficial Corruption," Norway; Department of Economics, University of Bergen 179, Department of Economics, University of Bergen.
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    12. Timothy Feddersen & Wolfgang Pesendorfer, 1997. "Voting Behavior and Information Aggregation in Elections with Private Information," Econometrica, Econometric Society, vol. 65(5), pages 1029-1058, September.
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    14. Timothy Feddersen & Wolfgang Pesendorfer, 1996. "Convicting the Innocent: The Inferiority of Unanimous Jury Verdicts," Discussion Papers 1170, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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