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|Title:||Evidence for Relational Contracts in Sovereign Bank Lending|
|Authors:||ILUT Cosmin; BENCZUR PETER|
|Citation:||JOURNAL OF THE EUROPEAN ECONOMIC ASSOCIATION vol. 14 no. 2 p. 375-404|
|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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