| Abstract:  We study the decision an entrepreneur faces in
financing multiple projects and show that relationship financing will arise
endogenously in an environment where strategic defaults are likely, even
when firms have access to arm's-length financing. Relationship financing
allows an entrepreneur to build a private reputation for repayment that
reduces the cost of financing. However, in an environment where the risk
of strategic default is low, the benefits from reputation building are outweighed
by holdup rents extractable by the incumbent lender. Entrepreneurs then
choose to finance projects from single or multiple arm's-length lenders.
Full paper (268 KB PDF)
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Last update: January 29, 2002