Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5090982 | Journal of Banking & Finance | 2007 | 17 Pages |
Abstract
This paper studies how the cost of switching banks affects the profits available from relationship based lending when the relationship produces inside information. Lower switching cost compounds the adverse selection problem, discouraging outsider banks to depress loan rates. The adverse selection effect eases off along with higher switching cost, leading to more aggressive bidding and thereby reduction in insider profits. Above a certain threshold, however, the adverse selection effect vanishes completely and the insider profits turn increasing in the switching cost. The model predicts that the availability of relationship credit is non-monotonously related to the magnitude of the switching cost.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Timo Vesala,