A relational theory of relationship lending under contractual incompleteness

Arbeitspapier

While the literature has focused on relationships as a technology for solving hidden information problems in credit markets, hidden action has been very little explored as an explanation for the existence of relational lending. In this paper, we propose a theory in which relationships are driven by the problem of contractual incompleteness in instances in which a borrower, by taking ex-ante actions, magnifies the hazards related to ex-post bargaining over returns. A relationship commits the borrower to take actions that minimize the ex-post conflict of interests resulting from contractual incompleteness. We show that a robust feature of an optimally designed lending relationship (i.e., the best Public Perfect Pure Strategy Equilibrium in a repeated lending game) is that a sufficiently patient entrepreneur, upon choosing his actions, ignores his privately observed contingencies. This commitment solves the credit rationing problem that arises in a one-shot (arm’s length) interaction, and reduces, when compared to arm’s length financing, the interest rate that a bank charges for a credit line. Although in a less acute fashion, we also show that the same features just described appear in an optimal lending relationship for the case in which the entrepreneur is impatient.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Texto para discussão ; No. 520

Klassifikation und Themen

• Klassifikation: Wirtschaft

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Carrasco, Vinicius ; de Mello, João M. P.
• Ereignis: Veröffentlichung
• (wer): Pontifícia Universidade Católica do Rio de Janeiro (PUC-Rio), Departamento de Economia
• (wo): Rio de Janeiro
• (wann): 2008

Weitere Informationen

• Handle: http://hdl.handle.net/10419/176003
• Letzte Aktualisierung: 10.03.2025, 11:43 MEZ