Memory in Contracts: The Experience of the EBRD (1991-2003)

Abstract:     
The objective of this paper is to investigate the financing strategy adopted by the European Bank for Reconstruction and Development (EBRD) in the period 1991-2003. We propose a simple empirical method to isolate the most effective screening device for contracts granted under conditions of asymmetric information. In line with the predictions of the contract theory, the role of memory is dominant. By exploiting the information about the number and type of contracts by client, we approximate the client's reputation. Our results unambiguously isolate the dominant effect of memory on the bank's lending decisions over market factors in the case of established clients.

Number of Pages in PDF File: 42

Keywords: Financial contracts, Memory, Screening devices, Fixed effects technique

JEL Classification: G21, L14, P33, P36

working papers series