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Theory of Bank Lending with Monitoring and Application to Rural Banking in India 2002-2003

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Abstract

We present a model in Costly State Verification framework that relates capital raised in a firm to profitability. We explain how optimality of investment is affected by how the aggregate funding affects the expected outcomes of the project. Although we find underinvestment, the problem does not get severe with increasing dead weight costs.

Suggested Citation

  • Mukhopadhyay, B., 2005. "Theory of Bank Lending with Monitoring and Application to Rural Banking in India 2002-2003," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 2(2), pages 85-100.
    • Handle: RePEc:eaa:ijaeqs:v:2:y2005:i:2_7
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    References listed on IDEAS

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    More about this item

    Keywords

    Strategic default; Underinvestment; CSV;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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