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Syndication and Robust Collusion in Financial Markets

  • Vinicius Carrasco

    ()

    (Department of Economics PUC-Rio.)

  • Gustavo Manso

    ()

    (Graduate School of Business, Stanford University.)

Registered author(s):

    This paper investigates the extent to which syndication in financial markets is related to collusive behavior. A group of financiers who have private information regarding their capability of monitoring an entrepreneur must decide whether to provide a loan individually in a competitive fashion, or provide it collectively. When deciding whether to provide the loan collectively, the lenders bargain over their participation, on who will be monitoring the lender (the leader), and on pricing. It is shown that if the bargaining stage is robust to timing of communication of their private information (Ex-Post Incentive Compatibility), and if the lenders believe it is better to agree on a collective deal than competing, positive participation in the loan is given to all lenders even when side payments are allowed. Hence, we show that syndication is the optimal response of colluding lenders to the communication costs resulting from the negotiations between them for a given loan. Syndication improves on pricing but introduces a distortion by leaving the most effective monitor with less than full participation in the loan. Necessary conditions for syndication prevailing over competition are provided.

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    File URL: http://www.econ.puc-rio.br/pdf/td522.pdf
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    Paper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number 522.

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    Length: 36p.
    Date of creation: May 2006
    Date of revision:
    Handle: RePEc:rio:texdis:522
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    1. David A. Miller, 2012. "Robust Collusion with Private Information," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 778-811.
    2. Pegaret Pichler & William Wilhelm, 2001. "A Theory of the Syndicate: Form Follows Function," OFRC Working Papers Series 2001fe05, Oxford Financial Research Centre.
    3. Raaj Kumar Sah & Joseph E. Stiglitz, 1984. "The Architecture of Economic Systems: Hierarchies and Polyarchies," NBER Working Papers 1334, National Bureau of Economic Research, Inc.
    4. Jonathan Levin, 2000. "Relational Incentive Contracts," Working Papers 01002, Stanford University, Department of Economics.
    5. Susan Athey & Kyle Bagwell, 1999. "Optimal Collusion with Private Information," Working papers 99-17, Massachusetts Institute of Technology (MIT), Department of Economics.
    6. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
    7. William Wilhelm & Pegaret Pichler, 2001. "A Theory of the Syndicate: Form Follows Function," Economics Series Working Papers 2001-FE-05, University of Oxford, Department of Economics.
    8. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
    9. Athey, S., 1997. "Sigle Crossing Properties and the Existence of Pure Strategy Equilibria in Games of Incomplete Information," Working papers 97-11, Massachusetts Institute of Technology (MIT), Department of Economics.
    10. Paul Milgrom & Ilya Segal, 2002. "Envelope Theorems for Arbitrary Choice Sets," Econometrica, Econometric Society, vol. 70(2), pages 583-601, March.
    11. Dennis, Steven A. & Mullineaux, Donald J., 2000. "Syndicated Loans," Journal of Financial Intermediation, Elsevier, vol. 9(4), pages 404-426, October.
    12. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 473-94, July.
    13. Pegaret Pichler, 2001. "A Theory of the Syndicate: Form Follows Function," Journal of Finance, American Finance Association, vol. 56(6), pages 2237-2264, December.
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