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Relationship Banking, State Co-Ordination and Long-Term Debt: Reinterpreting the Big Push

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Author Info
Sanjay Basu () (National Institute of Bank Management, Pune)
Swapnendu Bandyopadhyay (Banerjee) () (National University of Singapore)
Abstract

We develop a lending game in which relationship-specific investments by firms benefit banks and vice versa. We show that even if all firms and banks prefer high-tech relationship loans under the first-best, asymmetric information and investment non-contractibility make them choose low-tech transaction loans. However, governments with intermediate risk ratings can use Groves subsidies for a concerted switch to long-term relationship loans. To avoid premature liquidation, they finance the scheme with long-term foreign debt. Thus, we try to explain the positive correlation between subsidies and long-term domestic and foreign debt, which was a salient feature of the East Asian development experience.

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Paper provided by National University of Singapore, Department of Economics in its series Departmental Working Papers with number wp0502.

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Date of creation: 2005
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Handle: RePEc:nus:nusewp:wp0502

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Related research
Keywords: Relationship Banking Groves Subsidies Intermediate Rating Long-term Debt

Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
O30 - Economic Development, Technological Change, and Growth - - Technological Change - - - General

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