Monitoring and incentives under multiple-bank lending: The role of collusive threats

Kaniṣka Dam and Prabal Roy Chowdhury

Journal of Economic Theory, 2021, vol. 197, issue C

Abstract: We examine interactions between multiple bank-loan officer-borrower hierarchies. Possibility of collusion between the borrower and the loan officer(s) in charge of monitoring shapes incentives for the loan officers. When ‘borrower quality is low’, collusive threats induce over-monitoring in a collusion-free equilibrium, whereas for high borrower quality, monitoring is at its non-delegation level—an outcome akin to vertical integration. Under multiple-bank lending, delegation contracts may solve the free-riding problem in monitoring, and lead to more intense monitoring relative to single-bank lending. This is because collusive threats make monitoring efforts strategic complements because of a novel ‘rent-jamming’ effect—a hitherto unexplored effect of multiple-bank lending. We further show that a bank may decide not to employ a monitor and free-ride on the information gathered by the loan officer of the other bank, which in turn provides a new rationale for syndicated lending based on collusive threats. Moreover, consistent with recent empirical evidence, our analysis implies that bank monitoring behaves counter-cyclically.

Keywords: Multiple-bank lending; Vertical collusion; Counter-cyclical monitoring; Syndicated lending (search for similar items in EconPapers)
JEL-codes: D23 D86 G21 L13 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S002205312100137X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:197:y:2021:i:c:s002205312100137x

DOI: 10.1016/j.jet.2021.105320

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().