Small Business Economics

, Volume 27, Issue 2–3, pp 127–137 | Cite as

‘Relationship Banking and SMEs: A Theoretical Analysis’

  • Timo Baas
  • Mechthild SchrootenEmail author


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.


accounting financial constraints relationship banking small and medium sized enterprises 

Jel Classification

D43 D82 G21 M41 


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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

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