IDEAS home Printed from https://ideas.repec.org/p/mnh/spaper/13253.html
   My bibliography  Save this paper

Allowing for risk choice in Diamond's "Financial intermediation as delegated monitoring"

Author

Listed:
  • Hellwig, Martin

Abstract

The paper studies the relative efficiency of intermediated finance and direct finance in a variant of Diamond's (1984) model of ''financial intermediation as delegated monitoring''. Project sizes are taken to be variable so a choice must be taken on whether to fund a small number of projects on large scale or a large number of projects on a small scale. In the absence of effective advance commitments to lending policies, this introduces an additional agency problem of intermediated finance as the well known excessive-risk-taking effect of debt finance induce intermediaries to underdiversify. The paper analyses the impact of this effect on the performance of intermediated finance under various assumptions about project technologies. Most strikingly, in the case of fixed monitoring costs and project technologies with stochastic constant returns to scale, there is no diversification at all, and intermediated finance is worse than direct finance. In this very case, with effective advance commitments to lending policies, an optimal intermediation arrangement would exploit both, the scope for diversification and the scale effects in monitoring so as to attain approximately first-best outcomes when there are many available projects.

Suggested Citation

  • Hellwig, Martin, 1998. "Allowing for risk choice in Diamond's "Financial intermediation as delegated monitoring"," Papers 98-04, Sonderforschungsbreich 504.
    • Handle: RePEc:mnh:spaper:13253
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hellwig, Martin, 1998. "On the economics and politics of corporate finance and corporate control," Papers 98-43, Sonderforschungsbreich 504.
    2. Sonja Daltung & Vittoria Cerasi, 2006. "Financial structure, managerial compensation and monitoring," FMG Discussion Papers dp576, Financial Markets Group.
    3. Fabio Di Vittorio & Delong Li & Hanlei Yun, 2018. "On Bank Consolidation in a Currency Union," IMF Working Papers 2018/092, International Monetary Fund.
    4. Carletti, Elena & Cerasi, Vittoria & Daltung, Sonja, 2007. "Multiple-bank lending: Diversification and free-riding in monitoring," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 425-451, July.
    5. Cerasi, Vittoria & Daltung, Sonja, 2006. "Financial structure, managerial compensation and monitoring," LSE Research Online Documents on Economics 24634, London School of Economics and Political Science, LSE Library.
    6. Urs W. Birchler, 2000. "Are banks excessively monitored?," Working Papers 00.14, Swiss National Bank, Study Center Gerzensee.
    7. Gianni De Nicolo, 2000. "Size, charter value and risk in banking: an international perspective," International Finance Discussion Papers 689, Board of Governors of the Federal Reserve System (U.S.).
    8. Bertrand Rime, 2007. "Could Regional and Cantonal Banks Reduce Credit Risk through National Diversification?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(I), pages 49-65, March.
    9. Alex Stomper, 2006. "A Theory of Banks' Industry Expertise, Market Power, and Credit Risk," Management Science, INFORMS, vol. 52(10), pages 1618-1633, October.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mnh:spaper:13253. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Katharina Rautenberg (email available below). General contact details of provider: https://edirc.repec.org/data/sfmande.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.