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Short-Term Contracts as a Monitoring Device

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  • Patrick Rey
  • Joseph E. Stiglitz

Abstract

This paper focuses on two separate problems. The first is that frequently, the most profitable use of funds involves long-term investments, which militiates for long-term debt contracts. The second problem is to monitor the investor's use of funds, as exemplified by the U.S. S&L saga, and we argue that short-term debt provides investors, who can withdraw their funds, with a real threat over firms. We show that short-term investors have both desirable incentives to exert control and invest in monitoring, and that this monitoring concern provides an explanation of the often lamented disparity between the maturity of banks' assets and liabilities. We also explore in detail the trade-off between long-term and short-term debt, including the possibility of multiple contracts and of priority rules.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4514.

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Date of creation: Oct 1993
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Handle: RePEc:nbr:nberwo:4514

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  1. Jaffee, Dwight M, 1989. "Symposium on Federal Deposit Insurance for S&L Institutions," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 3(4), pages 3-9, Fall.
  2. Kane, Edward J, 1989. "The High Cost of Incompletely Funding the FSLIC Shortage of Explicit Capital," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 3(4), pages 31-47, Fall.
  3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  4. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  5. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(4), pages 647-63, October.
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Cited by:
  1. Memmel, Christoph & Gündüz, Yalin & Raupach, Peter, 2012. "The common drivers of default risk," Discussion Papers 36/2012, Deutsche Bundesbank, Research Centre.
  2. Basu , Kaushik & Stiglitz, Joseph E., 2013. "International lending, sovereign debt and joint liability : an economic theory model for amending the treaty of Lisbon," Policy Research Working Paper Series 6555, The World Bank.
  3. Musalem, Alberto R. & Impavido, Gregorio & Tressel, Thierry, 2001. "Contractual savings, capital markets, and firms'financing choices," Policy Research Working Paper Series 2612, The World Bank.
  4. Ralph De Haas & Neeltje Van Horen, 2011. "Running for the exit: international banks and crisis transmission," Working Papers, European Bank for Reconstruction and Development, Office of the Chief Economist 124, European Bank for Reconstruction and Development, Office of the Chief Economist.
  5. Kharroubi, E., 2006. "Illiquidity, Financial Development and the Growth-Volatility Relationship Illiquidity, Financial Development and the Growth-Volatility Relationship," Working papers, Banque de France 139, Banque de France.
  6. Impavido, Gregorio & Musalem, Alberto R. & Tressel, Thierry, 2001. "Contractual savings institutions and banks'stability and efficiency," Policy Research Working Paper Series 2751, The World Bank.
  7. Opazo, Luis & Raddatz, Claudio & Schmukler, Sergio L., 2014. "Institutional investors and long-term investment : evidence from Chile," Policy Research Working Paper Series 6922, The World Bank.

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