Relative Performance Evaluations in a Model of Financial Intermediation

This paper focuses on the delegation of bank managers of lending decisions to their agents typically subordinate employees of the bank. We assume that agents may base their decisions about lending to borrowers on decisions other banks have made about these same borrowers. Then we show that there exist some lazy or negligent agents who neither directly monitor the borrower nor imitate the other banks if managers use relative performance evaluations as incentive schemes. In addition, it is shown that the learning or adjustment process of agents exhibits cyclical dynamics. (Copyright: Elsevier)