Abstract
In this paper, we study why multiple banks lend to the same project even though they are not constrained by the availability of funds. The choice of the amount of debt, as well as the hierarchy of debt claim is endogenized. We find that the hierarchy among the creditors is exclusively determined by their monitoring costs. We identify conditions under which group lending is efficient. We also establish a possible rationale behind the observed phenomenon where a system of consortium lending is increasingly being replaced by syndicated lending.
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