Race to collusion: Monitoring and incentive contracts for loan officers under multiple-bank lending
Kanishka Dam () and
Prabal Roy Chowdhury
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Kanishka Dam: Center for Research and Teaching in Economics (CIDE)
Prabal Roy Chowdhury: Indian Statistical Institute, Delhi
Discussion Papers from Indian Statistical Institute, Delhi
The possibility of vertical collusion between an informationally opaque borrower and corruptible loan officers, to whom the task of monitoring is delegated, in bank-loan officer-borrower hierarchies shapes the incentive contracts for the loan officers. Collusive threats exacerbate incentives for overmonitoring, and make monitoring efforts of the banks strategic complements because of a novel â€˜race-to-collusionâ€™ effectâ€”a hitherto unexplored effect of multiple-bank lending. Thus, delegation contract solves the free-riding problem in the presence of monitoring duplication, and may lead to higher levels of per-bank monitoring in multiple-bank lending. Moreover, over-monitoring, albeit inefficient relative to the optimal contract in the absence of race-to-collusion, may enhance social welfare. We further show that the collusion-proofness principle may fail to hold under multiple-bank lending.
Pages: 54 pages
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Persistent link: https://EconPapers.repec.org/RePEc:alo:isipdp:20-05
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