Relationship Lending: Characteristics and Real Effects

We evaluate the mechanisms behind relationship lending and its macroeconomic consequences. Using confidential credit registry data merged with firm tax records in Chile, we find that a closer relationship with a bank gives firms access to more credit at better terms. More productive and larger firms have closer relationships with banks. We build a dynamic model of firm behavior where firms choose their relationship status jointly with investment and borrowing decisions. Calibrating the model to Chilean data, we find that borrowing in relationships allows for greater screening and monitoring of firms, provides implicit guarantees to other creditors and necessitates a lower amount of collateral. More productive firms select into relationships, and relationship lending allows for larger loans at lower interest rates. Counterfactual experiments indicate that the effects of relationship lending are large. Extending these benefits to all firms results in an increase of almost 30 percent in aggregate output, capital and TFP.