Entrepreneurial moral hazard and bank monitoring: A model of the credit channel

This paper develops a model of the choice between bank and market finance b y entrepreneurial firms that differ in the value of their net worth. The mo nitoring associated with bank finance ameliorates a moral hazard problem be tween the entrepreneurs and their lenders. The model is used to analyze the different strands of the credit view of the transmission of monetary polic y. In particular, we derive the empirical implications of a broad credit ch annel, and compare them to those obtained when the model is extended to inc orporate some elements of the bank lending channel. (C) 2000 Elsevier Scien ce B.V. All rights reserved. JEL classification: E44; E50; D82.