Abstract
This paper shows the importance of banking market competition jointly with the number of bank relationships to identify the circumstances where banks and firms are able to establish mutually beneficial long-term relationships. We empirically analyze the effect of the duration of the relationship on the availability of credit and the interest rate on loans using a US survey of small firms. We find that relationship lending is more likely to arise when banking market competition is low and when firms restrict themselves to borrow from relatively few lenders. We show that banking competition and lending relationships are compatible provided that the firm confers monopoly power to the financial institution by committing to borrow exclusively from it.
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