Relationship Lending and Switching Costs under Asymmetric Information about Bank Types

Abstract

This theoretical paper extends the pioneering articles on relationship lending (e.g., Sharpe 1990;Rajan 1992;von Thadden 2004) by examining relationship lending and hold-up problems in credit markets when borrowers are identical and banks are different. The results show that existing borrowers are informationally captured by good banks and yield profits to them, but new borrowers are unprofitable. In this market, short-term loan contracts and unsecured loans are optimal while loan commitments should not be used. Further, banks and borrowers have long-term relationships. This paper challenges the standard theories on product quality, reputation and experience goods by introducing scenarios in which good and bad banks can retain their existing borrowers. In the standard theories, consumers leave bad producers and search for good ones.

Bank switching of US small businesses: new methods and evidence

“…In Von Thadden's (2004) revision of Sharpe's (1990) model, borrowers could even attain lower rates outside the relationship, with the riskier of them appearing more probable to switch. As an extension to the above traditional models developed by Sharpe (1990), Rajan (1992) and von Thadden (2004), a recent study by Niinimäki (2021) confirms the existence of the holdup problem, while highlighting the need for further empirical work to shed light on the precise sources of the switching costs.…”

Analysis of the risk transmission mechanism of monetary policy in the monetary and financial service sectors from the perspective of asset-liability management

“…On the one hand, monetary and financial services companies with high deposits often face an excess of liquidity, which negatively affects their profitability; thus, they are motivated to actively take more risks on the asset side [ 46 ]. On the other hand, the loan amount was an important evaluation benchmark for monetary and financial services companies, and the steady increase in deposits also creates incentives for monetary and financial services companies to provide riskier loans [ 47 ]. With changes to monetary policy, the liability- and asset-side risks both change as well.…”

Experience Goods, Umbrella Branding, and Reputation

“…In particular, the paper is related to research on brands. Tadelis (1999Tadelis ( , 2002, for instance, examines trade in brand names, whereas Nilssen (1992Nilssen ( , 2000, Gabszewicz et al (1992), Mills (1998, 1999), Villas-Boas (1999, 2006, Shy (2002Shy ( , 2011, Vagstad (2003, 2008), Chioveanu (2008), Doganoglu (2010), Schmidt (2010Schmidt ( , 2013 and Niinimaki (2022) investigate brand switching/brand loyalty.…”