Financial Intermediation and Delegated Monitoring

@article{Diamond1984FinancialIA,
  title={Financial Intermediation and Delegated Monitoring},
  author={Douglas W. Diamond},
  journal={The Review of Economic Studies},
  year={1984},
  volume={51},
  pages={393-414}
}
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… 
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