Multiple Banking Relationships: Competition among "inside" Banks
Why firms apply for credit at several banks? The model presented here provides an answer, based on the customer relationships approach. A bank makes an initial investment in information production on a borrowing firm; such an investment must later be compensated: the firm has to share its profits (if any) with the bank. The bank may be able to impose this sharing, when the firm asks for the rollover of a short term loan, thanks to the informational advantage she has over other lenders; but this "informational rent" lowers the firm owner's incentives to exert effort. Therefore, the firm needs a way to minimize such a rent: this may be done by applying for credit at more than one bank, thus building up competition among "inside" (informed) banks. On the other hand, it is crucial that this competition does not drive the informational rent to zero: in such a case, no bank would be willing to lend. The alternative of a long term loan is also examined, showing that it creates some incentive distortion as well.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
When requesting a correction, please mention this item's handle: RePEc:mul:jqat1f:doi:10.1427/8531:y:2002:i:2:p:165-196. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.