Relationship Banking, State Co-Ordination and Long-Term Debt: Reinterpreting the Big Push

Sanjay Basu () and Swapnendu Bandyopadhyay (Banerjee) ()
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Sanjay Basu: National Institute of Bank Management, Pune
Swapnendu Bandyopadhyay (Banerjee): National University of Singapore

Departmental Working Papers from National University of Singapore, Department of Economics

Abstract: We develop a lending game in which relationship-specific investments by firms benefit banks and vice versa. We show that even if all firms and banks prefer high-tech relationship loans under the first-best, asymmetric information and investment non-contractibility make them choose low-tech transaction loans. However, governments with intermediate risk ratings can use Groves subsidies for a concerted switch to long-term relationship loans. To avoid premature liquidation, they finance the scheme with long-term foreign debt. Thus, we try to explain the positive correlation between subsidies and long-term domestic and foreign debt, which was a salient feature of the East Asian development experience.

Keywords: Relationship Banking; Groves Subsidies; Intermediate Rating; Long-term Debt (search for similar items in EconPapers)
JEL-codes: G21 H63 L14 O30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-fin
Date: 2005
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