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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page On the Sequencing of Projects, Reputation Building, and Relationship Finance
Dominik Egli; Steven Ongena; David C. Smith
2002-718  (January 2002)

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)

relationship financing, reputation building, staged financing, contract enforcement, judicial efficiency

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Last update: January 29, 2002