Evidence for Relational Contracts in Sovereign Bank Lending

Peter Benczur and Cosmin Ilut

No 20391, NBER Working Papers from National Bureau of Economic Research, Inc

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 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.

JEL-codes: C73 D86 F34 G12 G14 G15 (search for similar items in EconPapers)
Date: 2014-08
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-gth
Note: AP EFG IFM
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Citations: View citations in EconPapers (7)

Published as Péter Benczúr & Cosmin L. Ilut, 2016. "EVIDENCE FOR RELATIONAL CONTRACTS IN SOVEREIGN BANK LENDING," Journal of the European Economic Association, vol 14(2), pages 375-404.

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Related works:
Journal Article: EVIDENCE FOR RELATIONAL CONTRACTS IN SOVEREIGN BANK LENDING (2016)
Journal Article: Evidence for Relational Contracts in Sovereign Bank Lending (2016)
Working Paper: Evidence for Relational Contracts in Sovereign Bank Lending (2010)
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