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Evidence for Relational Contracts in Sovereign Bank Lending

  • Cosmin Ilut

    (Duke University)

  • Peter Benczur

    (Central European University)

This paper presents direct evidence for relational (self-enforcing dynamic) 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. Such a punishment provides positive surplus to lenders after a default, a feature that characterizes relational contracts. Using developing country data 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.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 91.

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Date of creation: 2010
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Handle: RePEc:red:sed010:91
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