Evidence for Relational Contracts in Sovereign Bank Lending

35 Pages Posted: 25 Aug 2014 Last revised: 20 Mar 2023

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: August 2014

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.

Suggested Citation

Benczur, Peter and Ilut, Cosmin L., Evidence for Relational Contracts in Sovereign Bank Lending (August 2014). NBER Working Paper No. w20391, Available at SSRN: https://ssrn.com/abstract=2486341

Peter Benczur (Contact Author)

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

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

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

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