Small Business Economics

, Volume 27, Issue 2, pp 127–137

‘Relationship Banking and SMEs: A Theoretical Analysis’

Article

DOI: 10.1007/s11187-006-0018-7

Cite this article as:
Baas, T. & Schrooten, M. Small Bus Econ (2006) 27: 127. doi:10.1007/s11187-006-0018-7

Abstract

Reliable information on small- and medium-sized enterprises (SMEs) is rare and costly for financial intermediaries. Therefore relationship banking is often considered as the appropriate lending technique. In this paper we offer a theoretical model to analyze relationship banking and the pricing behavior of banks in a Bertrand competition framework with monitoring costs. We show that the lack of reliable information leads to comparable high interest rates even if a long-term relationship between borrower and bank exists. The paper offers a theoretical explanation why SMEs often are faced with borrowing constraints.

Keywords

accountingfinancial constraintsrelationship bankingsmall and medium sized enterprises

Jel Classification

D43D82G21M41

Copyright information

© Springer 2006

Authors and Affiliations

  1. 1.DIW Berlin, (German Institute for Economic Research)BerlinGermany
  2. 2.IAB Institute for Employment ResearchUniversity PotsdamNuernbergGermany
  3. 3.Hitotsubashi UniversityTokyoJapan