The structure of bank relationships, endogenous monitoring and loan rates

This paper investigates, in a simple model of overlapping moral hazard problems between banks and firms, how the number of bank relationships affect banks incentives to monitor their borrrowers and how, in turn, these decisions affect loan rates and firms choice between single and multiple relationships. The analysis shows that multiple lenders monitor less than a single lender. This is because they face duplication of effort and sharing of benefits in monitoring. However, as a consequence of diseconomies of scale in monitoring, multiple lenders do not necessarily require a higher loan rate. The firms choice between single and multiple relationships is not univocal, depending on the relative severity of bank moral hazard as compared to firm moral hazard.