Evidence for Relational Contracts in Sovereign Bank Lending

Cosmin Ilut and Peter Benczur

No 91, 2010 Meeting Papers from Society for Economic Dynamics

Abstract: This paper presents direct evidence for relational (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 relational contracts. Using developing country data 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.

Date: 2010
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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 (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed010:91

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