Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships

Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer... ABSTRACT Customer relationships arise between banks and firms because, in the process of lending, a bank learns more than others about its own customers. This information asymmetry allows lenders to capture some of the rents generated by their older customers; competition thus drives banks to lend to new firms at interest rates which initially generate expected losses. As a result, the allocation of capital is shifted toward lower quality and inexperienced firms. This inefficiency is eliminated if complete contingent contracts are written or, when this is costly, if banks can make nonbinding commitments that, in equilibrium, are backed by reputation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships

The Journal of Finance, Volume 45 (4) – Sep 1, 1990

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Publisher
Wiley
Copyright
1990 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1990.tb02427.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT Customer relationships arise between banks and firms because, in the process of lending, a bank learns more than others about its own customers. This information asymmetry allows lenders to capture some of the rents generated by their older customers; competition thus drives banks to lend to new firms at interest rates which initially generate expected losses. As a result, the allocation of capital is shifted toward lower quality and inexperienced firms. This inefficiency is eliminated if complete contingent contracts are written or, when this is costly, if banks can make nonbinding commitments that, in equilibrium, are backed by reputation.

Journal

The Journal of FinanceWiley

Published: Sep 1, 1990

References

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