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Working Paper
A Quantitative Theory of Relationship Lending
Borrower-lender relationships tend to be long-lasting, and borrowers switch lenders infrequently. We analyze the aggregate consequences of these facts in a model of heterogeneous banks subject to financial frictions that incorporates lending relationships as a form of customer capital for banks. The model's loan demand system is directly estimated on administrative loan-level data to recover key parameters governing the strength and persistence of relationships. The degree of market power deriving from lending relationships is consistent with a long run reduction in total credit of 4.1% ...