Evidence for Dynamic Contracts in Sovereign Bank Lending

Peter Benczur and Cosmin Ilut

No 11-06, Working Papers from Duke University, Department of Economics

Abstract: This paper presents direct evidence for self-enforcing dynamic 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. Such a punishment provides positive surplus to lenders after a default, a feature that characterizes dynamic contracts. Using data on bank loans to developing countries between 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.

Keywords: reputation; dynamic contracts; sovereign bank loan spreads; rational expectations; default risk (search for similar items in EconPapers)
JEL-codes: C73 D86 F34 G12 G14 G15 (search for similar items in EconPapers)
Pages: 31
Date: 2011
New Economics Papers: this item is included in nep-ban and nep-gth
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:duk:dukeec:11-06

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