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Financial Intermediation and Delegated Monitoring

Financial Intermediation and Delegated Monitoring Abstract This paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders. It presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary. Diversification within an intermediary serves to reduce these costs, even in a risk neutral economy. The paper presents some more general analysis of the effect of diversification on resolving incentive problems. In the environment assumed in the model, debt contracts with costly bankruptcy are shown to be optimal. The analysis has implications for the portfolio structure and capital structure of intermediaries. This content is only available as a PDF. © 1984 The Society for Economic Analysis Limited http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Economic Studies Oxford University Press

Financial Intermediation and Delegated Monitoring

The Review of Economic Studies , Volume 51 (3) – Jul 1, 1984

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References (18)

Publisher
Oxford University Press
Copyright
© 1984 The Society for Economic Analysis Limited
ISSN
0034-6527
eISSN
1467-937X
DOI
10.2307/2297430
Publisher site
See Article on Publisher Site

Abstract

Abstract This paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders. It presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary. Diversification within an intermediary serves to reduce these costs, even in a risk neutral economy. The paper presents some more general analysis of the effect of diversification on resolving incentive problems. In the environment assumed in the model, debt contracts with costly bankruptcy are shown to be optimal. The analysis has implications for the portfolio structure and capital structure of intermediaries. This content is only available as a PDF. © 1984 The Society for Economic Analysis Limited

Journal

The Review of Economic StudiesOxford University Press

Published: Jul 1, 1984

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