Banking Relations, Competition and Research Incentives

Thomas Gehrig

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania

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.

Keywords: relationship banking; multiple lending; monitoring; research incentives (search for similar items in EconPapers)
JEL-codes: D82 G21 L13 (search for similar items in EconPapers)
Date: 2000-02
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