# «IZA DP No. 4351 Reputation and Credit Market Formation: PAPER How Relational Incentives and Legal Contract Enforcement Interact Ernst Fehr DISCUSSION ...»

The table reports regression estimates using individual data on credit contract renewals in the RC. All columns report probit estimates for the probability that a borrower receives a private offer from the same lender in the next period. The dependent variable in all regressions is an indicator variable which takes on the value 1 if the borrower received a private offer from the same lender in the next period and 0 otherwise. In regression [1] we regress the dependent variable on the repayment level in the current period (Column ME [1] shows the corresponding marginal effects). In regression [2] we add the average repayment in all past periods and the number of previous interactions to the set of explanatory variables (Column ME [2] shows the corresponding marginal effects). In regression [3] we regress the dependent variable on an indicator variable that takes on the value 1 if the borrower has made a positive repayment in the current period (Column ME [3] shows the corresponding marginal effects).

In regression [4] we add the percentage of positive repayments in previous interactions and the number of previous interactions to the regression (Column ME [4] shows the corresponding marginal effects).

This table shows how much borrowers can gain in terms of expected short term profit if they choose project B although the lender asked for project A. The table displays expected period profits of borrowers for each possible project choice conditional on the total number of interactions with the current lender. The numbers in brackets display the number of observations. In the TPC it is simple to calculate the expected profits. Since the desired repayment is enforceable, we take all concluded contracts in which the lender desired project A and calculate the expected profits as follows: Expected profit = Probability of success x (Project return – Desired repayment). In the RC, in contrast, the desired repayment is not binding and the borrower can repay as much as he wants. In this case we take all accepted contracts in which the lender desired project A and the borrower successfully completed a project (either A or B). We calculate the expected profits as follows: Expected profit = Probability of success x (Project return – Observed repayment). We need to restrict the database to contracts with successful projects because the intended repayment in case of project failure is not observable. This does not bias the results, because project success is determined randomly.

The table reports regression estimates using individual data on credit contract renewals in the RC and the TPC. All columns report probit estimates for the probability that a borrower receives a private offer from the same lender in the next period. The dependent variable in all regressions is an indicator variable which takes on the value 1 if the borrower received a private offer from the same lender in the next period and 0 otherwise. In regression [1] we regress the dependent variable on the repayment level in the current period, a dummy variable for the TPC and the interaction terms of these two variables (Column ME [1] shows the corresponding marginal effects). In regression [2] we add the average repayment level in all past periods, the number of previous interactions and the corresponding interaction terms with the TPC dummy to the set of explanatory variables (Column ME [2] shows the corresponding marginal effects). In regressions [3] and [4] we replace current repayment level and average past repayment level with an indicator for a positive repayment and the percentage of positive repayments in previous interactions (Column ME [3] and ME [4] show the corresponding marginal effects).

Figure I: Realized Fraction of Available Number of Contracts over Time The figure displays the development of the realized fraction of the available number of contracts over the 20 periods of the experiment in the OC, the RC and the TPC.

Figure II: Average Repayments and Fraction of Ex Ante Profitable Contracts in the OC Panel A: The figure displays the development of average repayments over time in the OC. The grey line represents the lenders’ outside option (endowment storing) of 32.

Panel B: The figure shows the fraction of concluded contracts that were efficient from an ex ante perspective.

There are two cases in which the contract is profitable to the lender from an ex ante perspective. The first case is that the borrower chooses project A and repays at least 40 in case of success (Expected Profit = 0.8 x 40 = 32).

The second case is that the borrower chooses project B and repays at least 107 (Expected Profit = 0.3 x 107 ≈ 32).

In both these cases the expected profit for the lender is at least 32. In contracts with project failures we do not observe how much the borrower would have repaid if the project had been a success. Accordingly, we only use contracts with successful projects as the database for this figure. However, since project success is randomly determined, this does not bias the results.

Figure III: Average repayments in the OC and RC and Individual Repayments in the RC Panel A: The figure displays the development of average repayments after project success in the OC and the RC.

Panel B: The figure shows the frequency of positive repayments in periods 1-18 and periods 19-20 of the experiment using individual data from the RC. Each point in the figure represents one or several identical individuals. The size of the point indicates the number of observations.

Figure IV: Cumulative Frequency of Interactions of the Same Pair in the OC and RC The figure displays the cumulative frequency of trades which take place within pairs who interact a certain number of times with each other.

Figure V: Project Choice and Repayments Conditional on the Number of Interactions of a Pair Panel A: The figure displays the frequency with which project A is chosen in concluded contracts conditional on the number of interactions of the same pair in the RC.

Panel B: The figure shows the average repayment after project success conditional on the number of interactions of the same pair in the RC.

Figure VI: Cumulative Frequency of Interactions of the Same Pair in the RC and TPC The figure displays the cumulative frequency of trades which take place within pairs who interact a certain number of times with each other.

Figure VII: Project Choice and Repayments Conditional on the Number of Interactions of a Pair Panel A: The figure displays the frequency with which project A is chosen in concluded contracts conditional on the number of interactions of the same pair in the TPC.

Panel B: The figure shows the average repayment conditional on the number of interactions of the same pair in the TPC.