Financial Intermediation and Delegated Monitoring DOUGLAS W. DIAMOND University of ChicagoBackground of DiamondDOUGLAS W. DIAMONDGraduate School of Business University of Chicago Chicago, IL 60637 Phone: (773) 702-7283 E-mail: douglas.diamonduchicago.eduBorn: October 1953Martial Status: Married, two childrenA.B., Economics, Brown University, June 1975.M.A., Economics, Yale University, December 1976.M. Phil., Economics, Yale University, December 1977.Ph.D., Economics, Yale University, June 1980.Douglas W. Diamond specializes in the study of financialintermediaries, financial crises, and liquidity , bankregulation and deposit insurance; debt maturity structure and the role of short-term debt.Publications(1)“Information Aggregation in a Noisy Rational Expectations Economy,” Journal of Financial Economics, September 1981 (with Robert Verrecchia).(2)“Optimal Managerial Contracts and Equilibrium Security Prices,” Journal of Finance, May 1982 (with Robert Verrecchia).(3)“Bank Runs, Deposit Insurance and Liquidity,” Journal of Political Economy, June 1983 (with Philip Dybvig). (4)“Financial Intermediation and Delegated Monitoring,” Review of Economic Studies, July 1984.(5) “Optimal Release of Information by Firms,” Journal of Finance, September 1985.(6)“Banking Theory, Deposit Insurance and Bank Regulation,” Journal of Business, January 1986 (with Philip Dybvig).(7)“Debt Maturity Structure and Liquidity Risk,” Quarterly Journal of Economics, August 1991.(8)“Monitoring and Reputation: The Choice Between Bank Loans and Directly Placed Debt,”Journal of Political Economy, August 1991.(9)“Disclosure, Liquidity and the Cost of Capital,” Journal of Finance, September 1991. (withRobert Verrecchia).(10) “Bank Loan Maturity and Priority When Borrowers Can Refinance,” in Capital Markets and Financial Intermediation, Colin Mayer and Xavier Vives (editors), Cambridge University Press, 1993.(11)“Seniority and Maturity of Debt Contracts,” Journal of Financial Economics, June 1993.(12)“Corporate Capital Structure: The Control Roles of Bank and Public Debt, with Taxes and Costly Bankruptcy,” Economic Quarterly of the Federal Reserve Bank of Richmond, Spring 1994.(13)“Financial Intermediation as Delegated Monitoring, a Simple Example,” Economic Quarterlyof the Federal Reserve Bank of Richmond, Summer 1996.(14) “Liquidity, Banks, and Markets,” Journal of Political Economy, October 1997.(15)“Liquidity risk, liquidity creation and financial fragility: A theory of banking,” Journal of Political Economy 109 (April 2001). (with Raghuram Rajan).(16) “Banks, Short Term Debt and Financial Crises: Theory, Policy Implications and Applications,” March 2000, Carnegie Rochester Conference on Public Policy, 54 (Summer 2001). (with Raghuram Rajan).(17) “Banks and Liquidity,” American Economic Review, Papers and Proceedings, (May 2001). (with Raghuram Rajan).(18)“Liquidity Shortages and Banking Crises,” April 2005, Journal of Finance. (with Raghuram Rajan).(19)“Money in a Theory of Banking,” American Economic Review, March 2006. (with Raghuram Rajan).(20)“Delegated Monitoring and Legal Protection,” working paper, University of Chicago GSB, June 2005, revised October 2006.(21)“Banks and Liquidity Creation: A Simple Exposition of the Diamond-Dybvig Model,” Economic Quarterly of the Federal Reserve Bank of Richmond ,Spring 2007 Vol. 93 No. 2.(22)“Banks, Runs and Liquidity Creation,” working paper, University of Chicago GSB, January 2007, revised August 2007.(23)“Illiquidity and Interest Rate Policy,” working paper, University of Chicago, GSB, September 2008. (with Raghuram Rajan). Financial IntermediationInformationRiskCost TradingcostInformation asymmetriesRiskAversion Risk management&Participation costsFinancial Innovations SpiralFunction Gurley & Shaw : Money in a Theory of FinanceLeland & Pyle : Information asymmetries，financial structure，and financial intermediationDiamond: Financial Intermediation and Delegated MonitoringMerton : Financial Innovations SpiralAllen & Santomero : Managerial self-interest, The non-linearity of taxes, The cost of financial distress, The existence of capital market imperfectionOUTLINEThis 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 cost 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 resolving incentive problems. In the environment assumed in the model, debt contracts with costly bankruptcy are shown to be optimal. The a