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Working Paper
A Quantitative Theory of Relationship Lending
Borrower-lender relationships tend to be long-lasting, and lender switching is infrequent. What are the aggregate consequences of these facts? We address this question in a model of heterogeneous banks subject to financial frictions. We incorporate lending relationships using loan portfolio adjustment costs for borrowers and accumulation of "relationship capital" for lenders. The model's implied loan demand system is directly estimated on administrative loan-level micro data to recover the key novel parameters governing the strength and persistence of lending relationships. We find that ...