Connected Lending and Aggregate Productivity
The issue of connected lending is shown to be prevalent in many countries. This paper documents that in cross-country data connected lending is negatively associated with aggregate output and aggregate productivity. A model incorporating connected lend is presented and used to quantitatively study the effect of connected lending on aggregate productivity. The results show that connected lending has a moderately negative effect on aggregate productivity and can be better explained by the crony view than the information view. This implies that special connections between firms and banks generally do not reduce the asymmetric information between them. (original abstract)
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