Seminario CEDE - Miguel Acosta-Henao

Using confidential credit registry data, merged with firm tax records in Chile, we evaluate the macroeconomic consequences of relationship lending. We find that longer relationships between banks and firms give access to more credit at better terms, and that more productive and larger firms have stronger relationships with banks. We find no systematic evidence of evergreening. We build a dynamic model of firms behavior where firms choose to borrow within relationships or in arms-length transactions jointly with their investment and borrowing decisions. Calibrating the model to the Chilean data, we find that borrowing in relationships is characterized by lower collateral requirements and looser working capital constraints, but greater contract enforceability. Counterfactual experiments indicate that the effects of relationship lending are large. Eliminating relationship lending implies a loss of more than 40 percent in steady state output and capital, of which the most significant loss comes from the reduction in the banks’ ability to enforce the debt contract and repossess a greater fraction of firms´ assets in case of default.