This paper presents direct evidence for relational contracts in sovereign bank lending. Unlike the existing empirical literature, its instrumental variables method allows for distinguishing a direct influence of past repayment problems on current spreads (a "punishment" effect in prices) from an indirect effect through higher expected future default probabilities ("loss of reputation"). Such a punishment provides positive surplus to lenders after a default and decreases the borrower's present discounted value of the net benefits of future borrowing, which create dynamic incentives. Using data on bank loans to developing countries between 1973-1981 and constructing continuous variables for credit history, we find evidence that most of the influence of past repayment problems is through the direct, punishment channel.
ILUT Cosmin;
BENCZUR Peter;
2014-09-24
National Bureau of Economic Research
JRC91266
http://nber.org/papers/w20391,
https://publications.jrc.ec.europa.eu/repository/handle/JRC91266,
10.3386/w20391,
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