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Banking Relations, Competition and Research Incentives

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  • Thomas Gehrig

Abstract

When banks incur sunk costs to provide ex-ante information about customers, exclusive banking relations will occur under intense price competition when monitoring costs are low. When monitoring costs are sufficiently high, only non-monitored finance will be provided, typically, by multiple lenders. While multiple lending generally is (second-best) efficient when it emerges, relationship lending typically is not. In our framework, the informational rents in relationships of a single financier (house bank) typically exceed the risk premium required for financing projects from the unscreened pool of applicants. Accordingly, when entrepreneurs can affect repayment probabilities by sunk ex-ante investments prior to the financing stage, in a house bank regime investment incentives are typically lower than under conditions of competitive non-monitored lending.

Suggested Citation

  • Thomas Gehrig, 2000. "Banking Relations, Competition and Research Incentives," Center for Financial Institutions Working Papers 00-14, Wharton School Center for Financial Institutions, University of Pennsylvania.
  • Handle: RePEc:wop:pennin:00-14
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    File URL: http://fic.wharton.upenn.edu/fic/papers/00/0014.pdf
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    References listed on IDEAS

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    1. Ongena, Steven & Smith, David C., 2000. "What Determines the Number of Bank Relationships? Cross-Country Evidence," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 26-56, January.
    2. Ongena, Steven & Smith, David C., 2001. "The duration of bank relationships," Journal of Financial Economics, Elsevier, vol. 61(3), pages 449-475, September.
    3. Mitchell A. Petersen & Raghuram G. Rajan, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 407-443.
    4. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-1400, September.
    5. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-1087, September.
    6. Harhoff, Dietmar & Körting, Timm, 1998. "Lending Relationships in Germany: Empirical Results from Survey Data," CEPR Discussion Papers 1917, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    relationship banking; multiple lending; monitoring; research incentives;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • 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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