Relationship lending and competition: Higher switching cost does not necessarily imply greater relationship benefits
AbstractThis paper studies relationship lending in a framework where the cost of switching banks measures the degree of banking competition. The relationship lender’s (insider bank’s) informational advantage creates a lock-in effect, which is at its height when the switching cost is infinitesimal. This is because a low switching cost gives rise to a potential adverse selection problem, and outsider banks are thus reluctant to make overly aggressive bids. This effect gradually fades as the magnitude of the switching cost increases, which de facto reduces the insider bank’s profits. However, after a certain threshold in the switching cost, the insider bank’s ‘mark-up’ begins to increase again. Hence, relationship benefits are a non-monotonous (V-shaped) function of the switching cost. The ‘dynamic implication’ of this pattern is that relationship formation should be more common under extreme market structures ie when the cost of switching banks is either very low or sufficiently high. Recent empirical evidence lends support to this prediction.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0508018.
Length: 30 pages
Date of creation: 31 Aug 2005
Date of revision:
Note: Type of Document - pdf; pages: 30. Bank of Finland Research Discussion Papers 3/2005
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relationship lending; switching cost; banking competition;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-11-09 (All new papers)
- NEP-BEC-2005-11-09 (Business Economics)
- NEP-COM-2005-11-09 (Industrial Competition)
- NEP-FIN-2005-11-09 (Finance)
- NEP-FMK-2005-11-09 (Financial Markets)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
- Andrea Filippo Presbitero & Alberto Zazzaro, 2009.
"Competition and Relationship Lending: Friends or Foes?,"
Mo.Fi.R. Working Papers
13, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
- Presbitero, Andrea F. & Zazzaro, Alberto, 2011. "Competition and relationship lending: Friends or foes?," Journal of Financial Intermediation, Elsevier, vol. 20(3), pages 387-413, July.
- Andrea F. Presbitero & Alberto Zazzaro, 2010. "Competition and Relationship Lending: Friends or Foes?," CESifo Working Paper Series 3103, CESifo Group Munich.
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