Multiple Bank-Lending: Diversification and Free-Riding in Monitoring

43 Pages Posted: 6 Jul 2004

See all articles by Elena Carletti

Elena Carletti

Bocconi University - Department of Finance; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)

Vittoria Cerasi

Bicocca University - Department of Economics, Management & Statistics (DEMS)

Sonja Daltung

Ministry of Finance

Date Written: March 7, 2007

Abstract

This paper analyzes the optimality of multiple-bank lending, when firms and banks are subject to moral hazard and monitoring is essential. Multiple-bank lending leads to higher per-project monitoring whenever the benefit of greater diversification dominates the costs of free-riding and duplication of effort. The model predicts a greater use of multiple-bank lending when banks have lower equity, firms are less profitable and monitoring costs are high. These results are consistent with some empirical observations concerning the use of multiple-bank lending in small and medium business lending.

Keywords: individual-bank lending, multiple-bank lending, monitoring, diversification, free-riding problem

JEL Classification: D82, G21, G32

Suggested Citation

Carletti, Elena and Cerasi, Vittoria and Daltung, Sonja, Multiple Bank-Lending: Diversification and Free-Riding in Monitoring (March 7, 2007). Riksbank Research Paper Series No. 8; EFA 2004 Maastricht Meetings Paper No. 3180. Available at SSRN: https://ssrn.com/abstract=559948 or http://dx.doi.org/10.2139/ssrn.559948

Elena Carletti (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

Vittoria Cerasi

Bicocca University - Department of Economics, Management & Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy
+39-02-64485821 (Phone)
+39-02-64485878 (Fax)

Sonja Daltung

Ministry of Finance ( email )

Drottningatan 21
Stockholm 10333, 103 33
Sweden

HOME PAGE: http://www.sweden.gov.se/

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