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Theory of Bank Lending with Monitoring and Application to Rural Banking in India 2002-2003

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Abstract

We present a model in Costly State Verification framework that relates capital raised in a firm to profitability. We explain how optimality of investment is affected by how the aggregate funding affects the expected outcomes of the project. Although we find underinvestment, the problem does not get severe with increasing dead weight costs.

Suggested Citation

  • Mukhopadhyay, B., 2005. "Theory of Bank Lending with Monitoring and Application to Rural Banking in India 2002-2003," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 2(2), pages 85-100.
  • Handle: RePEc:eaa:ijaeqs:v:2:y2005:i:2_7
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    References listed on IDEAS

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    1. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
    2. Bruno Biais & Catherine Casamatta, 1999. "Optimal Leverage and Aggregate Investment," Journal of Finance, American Finance Association, vol. 54(4), pages 1291-1323, August.
    3. Laurence Booth, 2001. "Capital Structures in Developing Countries," Journal of Finance, American Finance Association, vol. 56(1), pages 87-130, February.
    4. Demirguc-Kunt, Ash & Levine, Ross, 1996. "Stock Markets, Corporate Finance, and Economic Growth: An Overview," World Bank Economic Review, World Bank Group, vol. 10(2), pages 223-239, May.
    5. Harris, Milton & Raviv, Artur, 1990. " Capital Structure and the Informational Role of Debt," Journal of Finance, American Finance Association, vol. 45(2), pages 321-349, June.
    6. Moore, Robert R, 1993. "Asymmetric Information, Repeated Lending, and Capital Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 393-409, August.
    7. Mukherji, Arijit & Nagarajan, Nandu J., 1995. "Moral hazard and contractibility in investment decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 26(3), pages 413-430, May.
    8. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 647-663.
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    More about this item

    Keywords

    Strategic default; Underinvestment; CSV;

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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