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Monitoring and incentives under multiple-bank lending: The role of collusive threats

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  • Dam, Kaniṣka
  • Roy Chowdhury, Prabal

Abstract

We examine interactions between multiple bank-loan officer-borrower hierarchies. Possibility of collusion between the borrower and the loan officer(s) in charge of monitoring shapes incentives for the loan officers. When ‘borrower quality is low’, collusive threats induce over-monitoring in a collusion-free equilibrium, whereas for high borrower quality, monitoring is at its non-delegation level—an outcome akin to vertical integration. Under multiple-bank lending, delegation contracts may solve the free-riding problem in monitoring, and lead to more intense monitoring relative to single-bank lending. This is because collusive threats make monitoring efforts strategic complements because of a novel ‘rent-jamming’ effect—a hitherto unexplored effect of multiple-bank lending. We further show that a bank may decide not to employ a monitor and free-ride on the information gathered by the loan officer of the other bank, which in turn provides a new rationale for syndicated lending based on collusive threats. Moreover, consistent with recent empirical evidence, our analysis implies that bank monitoring behaves counter-cyclically.

Suggested Citation

  • Dam, Kaniṣka & Roy Chowdhury, Prabal, 2021. "Monitoring and incentives under multiple-bank lending: The role of collusive threats," Journal of Economic Theory, Elsevier, vol. 197(C).
  • Handle: RePEc:eee:jetheo:v:197:y:2021:i:c:s002205312100137x
    DOI: 10.1016/j.jet.2021.105320
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    More about this item

    Keywords

    Multiple-bank lending; Vertical collusion; Counter-cyclical monitoring; Syndicated lending;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • 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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