Banking Relations, Competition and Research Incentives
AbstractWhen banks incur sunk costs to provide ex-ante information about customers, exclusive banking relations will occur under intense price competition when monitoring costs are low. When monitoring costs are sufficiently high, only non-monitored finance will be provided, typically, by multiple lenders. While multiple lending generally is (second-best) efficient when it emerges, relationship lending typically is not. In our framework, the informational rents in relationships of a single financier (house bank) typically exceed the risk premium required for financing projects from the unscreened pool of applicants. Accordingly, when entrepreneurs can affect repayment probabilities by sunk ex-ante investments prior to the financing stage, in a house bank regime investment incentives are typically lower than under conditions of competitive non-monitored lending.
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Bibliographic InfoPaper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 00-14.
Date of creation: Feb 2000
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More information through EDIRC
relationship banking; multiple lending; monitoring; research incentives;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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