Working Paper: NBER ID: w20391
Authors: Peter Benczur; Cosmin L. Ilut
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.
Keywords: relational contracts; sovereign lending; credit history; punishment effect; dynamic incentives
JEL Codes: C73; D86; F34; G12; G14; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| past repayment problems (F34) | current loan spreads (E43) |
| recent default (G33) | current loan spreads (E43) |
| past repayment problems (F34) | future default probabilities (G33) |
| recent default (G33) | future default probabilities (G33) |
| credit history (G21) | current loan spreads (E43) |