On information and commitment in financial intermediation
Modern financial economics considers the production and transfer of information about the characteristics of firms and investment projects to be an important function of financial intermediaries. However, the production of information or monitoring is itself riddled with information and incentive-related issues. For instance, how do the investors whose funds the intermediaries are investing, make sure that these intermediaries actually monitor their investments, in other words who monitors the monitor? What prevents firms from behaving opportunistically when monitoring reduces the cost of financial distress? What prevents the monitor from using its information monopoly to hold up the firm? In this dissertation each theoretical essay analyses the implications of one of these questions for the functioning of the financial system. Contrary to the view that financial fragility is an unfortunate by-product of liquidity, the first essay argues that the potential for bank runs that seem to be associated with the use of demand deposits to finance long-term loans, play an important role in the governance of banks. The second essay investigates contracting and monitoring choices when borrowers incentives are distorted because they expect informed lenders to be lenient in times of distress. Monitoring allows the bank to sort out potentially unproductive investments more efficiently than bond markets but it also diminishes the bank's relative ability to commit to liquidating poor performers, thereby worsening moral hazard in the market for new loans. Finally, the third essay analyses the choice between single versus multiple banking relationships. Although a single monitor may use its private information to hold up the firm, multiple banking relationships decrease the incentives of each bank to monitor the firm because each intermediary understands that after it has acquired information and sunk all related costs, it may have to compete with equally well-informed institutions for the firm's business. This competition transfers the available surplus to the borrower and monitoring may not be profitable for banks.
|Year of publication:||
|Authors:||Jean-Baptiste, Eslyn Lafortune|
|Type of publication:||Other|
Dissertations available from ProQuest
Persistent link: https://www.econbiz.de/10009439021
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