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Debt Enforcement and Relational Contracting

Author

Listed:
  • Martin Brown

    (University of St. Gallen)

  • Marta Serra García

    (University of Munich)

Abstract

We examine how third-party debt enforcement affects the emergence and performance of relational contracts in credit markets. We implement an experiment with finitely repeated credit relationships in which borrowers can default. In the weak enforcement treatment defaulting borrowers can keep their funds invested. In the strong enforcement treatment defaulting borrowers have to liquidate their investment. Under weak enforcement fewer relationships emerge in which loans are extended and repaid. When such relationships do emerge they exhibit a lower credit volume than under strong enforcement. These findings suggest that relational contracting in credit markets requires a minimum standard of third-party debt enforcement.

Suggested Citation

  • Martin Brown & Marta Serra García, 2012. "Debt Enforcement and Relational Contracting," Working Papers 1201, Departament Empresa, Universitat Autònoma de Barcelona, revised Jan 2012.
    • Handle: RePEc:bbe:wpaper:1201
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    More about this item

    Keywords

    Relational contracts; Debt enforcement; Creditor rights; Banking. stockholders; Dividends.;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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