Evidence for Dynamic Contracts in Sovereign Bank Lending

31 Pages Posted: 21 Apr 2011

See all articles by Peter Benczur

Peter Benczur

Central European University (CEU) - Department of Economics; National Bank of Hungary - Economics & Research Department

Cosmin L. Ilut

Duke University

Date Written: April 1, 2011

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

JEL Classification: C73, D86, F34, G12, G14, G15

Suggested Citation

Benczur, Peter and Ilut, Cosmin L., Evidence for Dynamic Contracts in Sovereign Bank Lending (April 1, 2011). Economic Research Initiatives at Duke (ERID) Working Paper No. 96, Available at SSRN: https://ssrn.com/abstract=1815443

Peter Benczur

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary

National Bank of Hungary - Economics & Research Department ( email )

Szabadsag ter 8-9
Budapest, H-1850
Hungary

Cosmin L. Ilut (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

HOME PAGE: http://econ.duke.edu/~cli2/index.html

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
115
Abstract Views
1,390
Rank
431,186
PlumX Metrics