Lecture III: Credit markets: the economics of a 'relational' contract
LECTURE III Credit markets: the economics of a “relational” contract Considered as a market transaction, credit has several distinct properties. Collectively, these are of enough consequence that the market for credit constitutes its own “ideal type” meriting an independent examination. The place to begin is by revisiting a crucial, if often implicit, assumption underlying the analysis of the market for commodities – that these are exchanges of inspection goods in a “spot” market. To review, in a spot market the transaction is negotiated and settled during a single meeting or interaction. The previous example was a suburban yard sale. There goods are inspected, prices negotiated, and cash tendered and accepted – all in the course of single meeting. Buyers and sellers neither require nor desire the identities, backgrounds, or references for the individual or individuals with whom they conduct such exchanges. To reiterate, such “spot” transactions are the implicit model underlying the textbook theory of supply and demand. Credit transactions are, and by their nature must be, qualitatively diﬀerent from the spot transactions that typify commodity markets. When a person or ﬁrm enters into a loan contract, they are committing themselves to an ongoing business relationship with another person or institution. Moreover, a loan is not an “inspection good” as one cannot know at the outset if one will be paid back. The lender, who above all wishes to see their money again, is shouldering the risk that this may not occur. For this reason they are necessarily interested in the...
You are not authenticated to view the full text of this chapter or article.
Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.
Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.
Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.