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

  • Elena Carletti
  • Vittoria Cerasi
  • Sonja Daltung

This paper analyzes the optimality of multiple-bank lending, when firms and banks are subject to moral hazard and monitoring is essential. Multiple-bank lending leads to higher per-project monitoring whenever the benefit of greater diversification dominates the costs of free-riding and duplication of effort. The model predicts a greater use of multiple-bank lending when banks are highly leveraged, firms are less profitable and monitoring costs are high. These results are consistent with some empirical observations concerning the use of multiple-bank lending in small and medium business lending.

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File URL: http://www.statistica.unimib.it/utenti/WorkingPapers/WorkingPapers/20061103.pdf
File Function: Revised version, 8 November 2006
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Paper provided by Università degli Studi di Milano-Bicocca, Dipartimento di Statistica in its series Working Papers with number 20061103.

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Length: 41 pages
Date of creation: Jul 2006
Date of revision: Nov 2006
Handle: RePEc:mis:wpaper:20061103
Contact details of provider: Postal: Via Bicocca degli Arcimboldi 8, 20126 Milano
Web page: http://www.statistica.unimib.it

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