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Debt Enforcement and Relational Contracting

Martin Brown () and Marta Serra García ()
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Marta Serra García: University of Munich

Authors registered in the RePEc Author Service: Marta Serra-Garcia

No 1201, Working Papers from Departament Empresa, Universitat Autònoma de Barcelona

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.

Keywords: Relational contracts; Debt enforcement; Creditor rights; Banking. stockholders; Dividends. (search for similar items in EconPapers)
JEL-codes: C73 F21 F34 G21 O16 (search for similar items in EconPapers)
Pages: 78 pages
Date: 2012-01, Revised 2012-01
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Published in Working Papers at the Department of Business, February pages 1-78

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