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Evidence for Dynamic Contracts in Sovereign Bank Lending

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  • Peter Benczur
  • Cosmin Ilut

Abstract

This paper presents direct evidence for self-enforcing dynamic 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. Such a punishment provides positive surplus to lenders after a default, a feature that characterizes dynamic contracts. 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.

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Bibliographic Info

Paper provided by Duke University, Department of Economics in its series Working Papers with number 11-06.

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Length: 31
Date of creation: 2011
Date of revision:
Handle: RePEc:duk:dukeec:11-06

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Related research

Keywords: reputation; dynamic contracts; sovereign bank loan spreads; rational expectations; default risk;

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Cited by:
  1. Guido Sandleris, 2012. "The Costs of Sovereign Defaults:Theory and Empirical Evidence," Business School Working Papers 2012-02, Universidad Torcuato Di Tella.

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