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Multiple-bank lending: diversification and free-riding in monitoring

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  • Carletti, Elena

    ()
    (Sonderforschungsbereich 504)

  • Cerasi, Vittoria

    ()
    (Universita degli Studi di Milano Bicocca)

  • Daltung, Sonja

    ()
    (Sveriges Riksbank)

Abstract

This paper analyses banks' choice between lending to firms in exclusive relationships and sharing financing with other banks in a context where both firms and banks are subject to moral hazard problems, and bank monitoring is essential for financing to take place. Multiple-bank lending is optimal whenever the benefit of greater diversification in terms of higher per-project monitoring dominates the costs of free-riding problem and duplication of efforts. The model predicts a greater use of multiple-bank lending when banks are small relative to the size of investment projects, when firms are less profitable, and when poor financial integration, strict regulation and inefficient judicial systems make monitoring more costly. These results are consistent with some empirical observations concerning small business lending and, to some extent, with the formation of syndicates.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 04-15.

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Length: 35 pages
Date of creation: 07 May 2004
Date of revision:
Handle: RePEc:xrs:sfbmaa:04-15

Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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