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Evidence For Relational Contracts In Sovereign Bank Lending

Listed author(s):
  • Péter Benczúr
  • Cosmin L. Ilut

This paper presents direct evidence for relational 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 ("loss of reputation"). Such a punishment provides positive surplus to lenders after a default and decreases the borrower's present discounted value of the net benefits of future borrowing, which create dynamic incentives. 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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File URL: http://hdl.handle.net/10.1111/jeea.2016.14.issue-2
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Article provided by European Economic Association in its journal Journal of the European Economic Association.

Volume (Year): 14 (2016)
Issue (Month): 2 (04)
Pages: 375-404

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Handle: RePEc:bla:jeurec:v:14:y:2016:i:2:p:375-404
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