Relationship Banking, State Co-Ordination and Long-Term Debt: Reinterpreting the Big Push
AbstractWe 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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Bibliographic InfoPaper provided by National University of Singapore, Department of Economics in its series Departmental Working Papers with number wp0502.
Date of creation: 2005
Date of revision:
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; Micro Finance Institutions; Mortgages
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- O30 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-02-06 (All new papers)
- NEP-CFN-2005-02-06 (Corporate Finance)
- NEP-FIN-2005-02-06 (Finance)
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