Flight to Quality or to Captivity: Information and Credit Allocation

Giovanni Dell'ariccia and Robert Marquez

No 2001/020, IMF Working Papers from International Monetary Fund

Abstract: Superior information exchanged over the course of lending relationships generates bank-client specificities to the extent that such information cannot be communicated credibly to outsiders. Consequently, banks obtain higher profits from more captured borrowers than from borrowers with financing alternatives. We refer to this as a “flight to captivity” effect. Negative shocks, associated with monetary contractions or foreign entry, cause a reallocation of bank credit away from more transparent borrowers and toward more opaque, more captured borrowers. The paper applies these ideas to the analysis of bank behavior in transition economies after financial liberalization and monetary policy contractions.

Keywords: WP; bank; borrower; customer; bank-client relationship; banking; information; credit allocation; quality borrower; cost advantage; borrower opaqueness; cost of funds; competitor bank; bank-client specificity; Bank credit; Credit; Foreign banks; Loans; Demand elasticity (search for similar items in EconPapers)
Pages: 25
Date: 2001-02-01
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Citations: View citations in EconPapers (9)

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