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Credit Registries, Relationship Banking and Loan Repayment

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  • Martin Brown
  • Christian Zehnder

Abstract

This paper examines the impact of a public credit registry on the repayment behavior of borrowers. We implement an experimental credit market in which loan repayment is not third-party enforceable. We compare market outcome with a credit registry to that without a credit registry. This experiment is conducted for two market environments: first a market in which interactions between borrowers and lenders are one-off, and, second, a market in which borrowers and lenders can choose to trade repeatedly with each other. In the market with one-off interactions the credit market collapses without a credit registry as lenders rightly fear that borrowers will default. The introduction of a registry in this environment significantly raises repayment rates and the credit volume extende by lenders. In the market where repeat transactions are possible a credit registry is not necessary to sustain high market performance. In such an environment relationship banking enforces repayment even when lenders cannot share information, so that there is little value added of a public credit registry.

Suggested Citation

  • Martin Brown & Christian Zehnder, 2005. "Credit Registries, Relationship Banking and Loan Repayment," IEW - Working Papers 240, Institute for Empirical Research in Economics - University of Zurich.
  • Handle: RePEc:zur:iewwpx:240
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    File URL: http://www.econ.uzh.ch/static/wp_iew/iewwp240.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. J. Reiß & Irenaeus Wolff, 2014. "Incentive effects of funding contracts: an experiment," Experimental Economics, Springer;Economic Science Association, vol. 17(4), pages 586-614, December.
    2. Fehr, Ernst & Fischbacher, Urs & Kosfeld, Michael, 2005. "Neuroeconomic Foundations of Trust and Social Preferences," IZA Discussion Papers 1641, Institute for the Study of Labor (IZA).
    3. Schram, Arthur & Brandts, Jordi & Gërxhani, Klarita, 2010. "Information, bilateral negotiations, and worker recruitment," European Economic Review, Elsevier, vol. 54(8), pages 1035-1058, November.
    4. Tania Singer & Ernst Fehr, 2005. "The Neuroeconomics of Mind Reading and Empathy," American Economic Review, American Economic Association, vol. 95(2), pages 340-345, May.
    5. Bjorn Bartling & Ernst Fehr & Klaus M. Schmidt, 2012. "Screening, Competition, and Job Design: Economic Origins of Good Jobs," American Economic Review, American Economic Association, vol. 102(2), pages 834-864, April.
    6. Klarita Gerxhani & Jordi Brandts & Arthur Schram, 2011. "The Emergence of Social Structure: Employer Information Networks in an Experimental Labor Market," Tinbergen Institute Discussion Papers 11-032/1, Tinbergen Institute.
    7. Armin Falk & Ernst Fehr & Christian Zehnder, "undated". "The Behavioral Effects of Minimum Wages," IEW - Working Papers 247, Institute for Empirical Research in Economics - University of Zurich.

    More about this item

    Keywords

    Credit Market; Information Sharing; Relationship Banking;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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