Evidence for Relational Contracts in Sovereign Bank Lending

Peter Benczur and Cosmin Ilut

Journal of the European Economic Association, 2016, vol. 14, issue 2, 375-404

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.

JEL-codes: C73 D86 F34 G12 G14 G15 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: EVIDENCE FOR RELATIONAL CONTRACTS IN SOVEREIGN BANK LENDING (2016)
Working Paper: Evidence for Relational Contracts in Sovereign Bank Lending (2014)
Working Paper: Evidence for Relational Contracts in Sovereign Bank Lending (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:jeurec:v:14:y:2016:i:2:p:375-404.

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