Syndication and Robust Collusion in Financial Markets
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.
|Date of creation:||May 2006|
|Date of revision:|
|Contact details of provider:|| Postal: Rua Marquês de São Vicente, 225, 22453-900 Rio de Janeiro, RJ|
Phone: 021 35271078
Fax: 021 35271084
Web page: http://www.econ.puc-rio.br
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Athey, Susan, 2001.
"Single Crossing Properties and the Existence of Pure Strategy Equilibria in Games of Incomplete Information,"
Econometric Society, vol. 69(4), pages 861-89, July.
- 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.
- 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.
- Robert M. Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
- Jonathan Levin, 2000.
"Relational Incentive Contracts,"
01002, Stanford University, Department of Economics.
- David A. Miller, 2012.
"Robust Collusion with Private Information,"
Review of Economic Studies,
Oxford University Press, vol. 79(2), pages 778-811.
- David A. Miller, 2005. "The dynamic cost of ex post incentive compatibility in repeated games of private information," Game Theory and Information 0510002, EconWPA.
- Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 473-494.
- Dennis, Steven A. & Mullineaux, Donald J., 2000. "Syndicated Loans," Journal of Financial Intermediation, Elsevier, vol. 9(4), pages 404-426, October.
- 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.
- 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.
- Susan Athey & Kyle Bagwell, 1999.
"Optimal Collusion with Private Information,"
99-17, Massachusetts Institute of Technology (MIT), Department of Economics.
- Paul Milgrom & Ilya Segal, 2002. "Envelope Theorems for Arbitrary Choice Sets," Econometrica, Econometric Society, vol. 70(2), pages 583-601, March.
- Pegaret Pichler & William Wilhelm, 2001. "A Theory of the Syndicate: Form Follows Function," OFRC Working Papers Series 2001fe05, Oxford Financial Research Centre.
- 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.
- Sah, Raaj Kumar & Stiglitz, Joseph E, 1986. "The Architecture of Economic Systems: Hierarchies and Polyarchies," American Economic Review, American Economic Association, vol. 76(4), pages 716-27, September.
- Pegaret Pichler, 2001. "A Theory of the Syndicate: Form Follows Function," Journal of Finance, American Finance Association, vol. 56(6), pages 2237-2264, December.
When requesting a correction, please mention this item's handle: RePEc:rio:texdis:522. 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.