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Market-Based Solutions to Vital Economic Issues

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Market-Based Solutions to Vital Economic Issues
Research
Jan 1, 2016

Bank Lending and Relationship Capital

Abstract

I develop an equilibrium theory of bank lending relationships in an economy subject to search frictions and limited enforceability. The model features a dynamic contracting problem embedded within a directed search equilibrium with aggregate and bank-specific uncertainty. The interaction between search and agency frictions generates a slow accumulation of lending relationship capital and distorts the optimal allocation of credit along both intensive and extensive margins. A crisis characterized by a sizable destruction of lending relationships therefore leads to a significant contraction in credit and a slow recovery, consistent with the Great Recession. I calibrate the model to study aggregate and cross-sectional implications and analyze policies aimed at reviving bank lending.

Citation

Boualam, M. Y. (2016). Bank lending and relationship capital.


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