Flight to Quality or to Captivity: Information and Credit Allocation

26 Pages Posted: 31 Jan 2006

See all articles by Giovanni Dell'Ariccia

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department; Centre for Economic Policy Research (CEPR)

Robert Marquez

University of California, Davis

Date Written: February 2001

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: banking, information, credit allocation

JEL Classification: E44, G21

Suggested Citation

Dell'Ariccia, Giovanni and Marquez, Robert S., Flight to Quality or to Captivity: Information and Credit Allocation (February 2001). IMF Working Paper No. 01/20, Available at SSRN: https://ssrn.com/abstract=879359

Giovanni Dell'Ariccia (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8135 (Phone)
202-623-4352 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Robert S. Marquez

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

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