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Evidence for Relational Contracts in Sovereign Bank Lending

Author

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  • Péter Benczúr
  • Cosmin L. Ilut

Abstract

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 for 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.

Suggested Citation

  • Péter Benczúr & Cosmin L. Ilut, 2016. "Evidence for Relational Contracts in Sovereign Bank Lending," Journal of the European Economic Association, European Economic Association, vol. 14(2), pages 375-404.
    • Handle: RePEc:oup:jeurec:v:14:y:2016:i:2:p:375-404.
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    File URL: http://hdl.handle.net/10.1111/jeea.12151
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    Cited by:

    1. Wache, Benjamin, 2021. "Information Frictions, Global Capital Markets, and the Telegraph," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242444, Verein für Socialpolitik / German Economic Association.
    2. Juan J. Cruces & Christoph Trebesch, 2013. "Sovereign Defaults: The Price of Haircuts," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 85-117, July.
    3. Maxime TERRIEUX & Benoît Jonveaux & Marin Ferry (Université Gustave Eiffel, DIAL), 2021. "Debt sustainability in Africa: state of play and future challenges," Working Paper 5b1b8e30-4a94-42f3-9e4b-9, Agence française de développement.
    4. Maxime TERRIEUX & Benoît Jonveaux & Marin Ferry (Université Gustave Eiffel, DIAL), 2021. "La soutenabilité des dettes en Afrique : état des lieux et enjeux futurs," Working Paper 5b1b8e30-4a94-42f3-9e4b-9, Agence française de développement.
    5. Catão, Luis A.V. & Mano, Rui C., 2017. "Default premium," Journal of International Economics, Elsevier, vol. 107(C), pages 91-110.
    6. Silano, Filippo, 2023. "Agency costs in primary dealer systems," ILE Working Paper Series 69, University of Hamburg, Institute of Law and Economics.
    7. Marin Ferry & Marc Raffinot, 2019. "Curse or Blessing? Has the Impact of Debt Relief Lived up to Expectations? A Review of the Effects of the Multilateral Debt Relief Initiatives for Low-Income Countries," Journal of Development Studies, Taylor & Francis Journals, vol. 55(9), pages 1867-1891, September.
    8. Fløgstad, Cathrin N. & Nordtveit, Ingvild, 2014. "Lending to developing countries: How do official creditors respond to sovereign defaults?," Working Papers in Economics 01/14, University of Bergen, Department of Economics.
    9. Mr. Tamon Asonuma, 2016. "Serial Sovereign Defaults and Debt Restructurings," IMF Working Papers 2016/066, International Monetary Fund.
    10. Eberhardt, Markus, 2018. "(At Least) Four Theories for Sovereign Default," CEPR Discussion Papers 13084, C.E.P.R. Discussion Papers.
    11. Christoph Trebesch & Mr. Michael G. Papaioannou & Mr. Udaibir S Das, 2012. "Sovereign Debt Restructurings 1950-2010: Literature Survey, Data, and Stylized Facts," IMF Working Papers 2012/203, International Monetary Fund.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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