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Related Lending and Economic Performance: Evidence from Mexico

Published online by Cambridge University Press:  10 September 2007

Noel Maurer  and
Stephen Haber
Noel Maurer
Affiliation:
Associate Professor of Business, Government, and the International Economy at the Harvard Business School.
Stephen Haber
Affiliation:
A.A. and Jeanne Welch Milligan Professor in the Department of Political Science, and Peter and Helen Bing Senior Fellow of the Hoover Institution, Stanford University. E-mail: [email protected].
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Abstract

Related lending, a widespread practice in LDCs, is widely held to encourage bankers to loot their banks at the expense of minority shareholders and depositors. We argue that neither looting nor credit misallocation are necessary outcomes of related lending. On the contrary, related lending often exists as a response to high information and contract-enforcement costs. Whether it encourages looting depends on other institutions, particularly those that create incentives to monitor directors. We examine Mexico's banking system, 1888–1913, in which there was widespread related lending. We find little evidence of credit misallocation, despite a financial crisis and government-organized rescue.

Type
ARTICLES
Information
The Journal of Economic History , Volume 67 , Issue 3 , September 2007 , pp. 551 - 581
Copyright
© 2007 The Economic History Association

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