Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/46275 
Year of Publication: 
2011
Series/Report no.: 
CESifo Working Paper No. 3349
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Existing literature sees opportunistic behaviour of contractual partners as the main reason why rational agents underinvest in relationship-specific assets. We look beyond this well-know holdup problem and argue that financial vulnerability and short-term planning horizon can also lead to such underinvestment. Subsequently, banks can stimulate growth-enhancing investment in relationship-specific assets by signalling creditworthiness and long-term planning horizon of their borrowers. We empirically confirm this hypothesis by showing that industries dependent on relationship-specific investment from their suppliers grow disproportionately faster in countries with a strong banking sector.
Subjects: 
financial development
relationship-specific investment
growth
JEL: 
G21
O16
O40
Document Type: 
Working Paper
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