Title: Evidence for Relational Contracts in Sovereign Bank Lending
Authors: ILUT CosminBENCZUR PETER
Citation: JOURNAL OF THE EUROPEAN ECONOMIC ASSOCIATION vol. 14 no. 2 p. 375-404
Publisher: WILEY-BLACKWELL
Publication Year: 2016
JRC N°: JRC92479
ISSN: 1542-4766
URI: http://onlinelibrary.wiley.com/doi/10.1111/jeea.12151/abstract;jsessionid=EB6711697720682C6001224F12CFE351.f03t02
http://publications.jrc.ec.europa.eu/repository/handle/JRC92479
DOI: 10.1111/jeea.12151
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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