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The relationship banking paradox: No pain no gain versus raison d'être

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  • Dong, Baomin
  • Guo, Guixia

Abstract

Relationship banking paradox refers to the case that credit market competition may threaten relationship banking practice, but it may stimulate it as well because of differentiation. Using a mixed model of adverse selection and double moral hazard, this paper shows that for some parameter values, relationship banking arises even when the banks compete à la Bertrand, hence supporting the no pain no gain hypothesis. This is due to multilayer nature of the information asymmetry by double moral hazard where an outside bank that does not have the borrower's proprietary information is unable to exert optimal levels of effort in the continuation game.

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  • Dong, Baomin & Guo, Guixia, 2011. "The relationship banking paradox: No pain no gain versus raison d'être," Economic Modelling, Elsevier, vol. 28(5), pages 2263-2270, September.
    • Handle: RePEc:eee:ecmode:v:28:y:2011:i:5:p:2263-2270
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    References listed on IDEAS

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    Cited by:

    1. Minyan Zhu, 2012. "Large Foreign Banks and Small-Medium Sized Enterprises (SMEs): Friends or Foes," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2012-06, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    2. Gajewski, Krzysztof & Pawłowska, Małgorzata & Rogowski, Wojciech, 2012. "Relacje firm z bankami w Polsce w świetle danych ze sprawozdawczości bankowej [Bank-firm relationships in Poland in the light of data from bank reporting]," MPRA Paper 42544, University Library of Munich, Germany, revised 29 Oct 2012.

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