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Debt Enforcement and Relational Contracting

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  • Brown, Martin
  • Serra-Garcia, Marta

Abstract

We examine how third-party debt enforcement affects the emergence and performance of relational contracts in credit markets. We implement an experiment with finitely repeated credit relationships in which borrowers can default. In our weak enforcement treatment defaulting borrowers can keep their funds invested. In our strong enforcement treatment defaulting borrowers have to liquidate their investment. Under weak enforcement fewer relationships emerge in which loans are extended and repaid. When such relationships do emerge they exhibit a lower credit volume than under strong enforcement. These findings suggest that relational contracting in credit markets requires a minimum standard of thirdparty debt enforcement.

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Bibliographic Info

Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 12287.

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Date of creation: Jun 2011
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Handle: RePEc:lmu:muenec:12287

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Keywords: Relational contracts; Debt enforcement; Creditor rights; Banking;

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Cited by:
  1. Giorgia Barboni & Tania Treibich, 2012. "(Just) first time lucky ? The impact of single versus multiple bank lending relationships on firms and banks' behavior," LEM Papers Series 2012/13, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

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