Title: Evidence for Relational Contracts in Sovereign Bank Lending
Citation: NBER Working Papers no. 20391 p. 1-33
Publisher: National Bureau of Economic Research
Publication Year: 2014
JRC N°: JRC91266
URI: http://nber.org/papers/w20391
DOI: 10.3386/w20391
Type: Articles in periodicals and books
Abstract: 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.
JRC Directorate:Space, Security and Migration

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