Article | Journal of Economic History | September 2007

Related Lending and Economic Performance: Evidence from Mexico

by Noel Maurer and Stephen Haber

Abstract

Related lending, a widespread practice in LDCs, is widely held to encourage bankers to loot their banks at the expense of minority shareholders and depositors. We argue that neither looting nor credit misallocation are necessary outcomes of related lending. On the contrary, related lending often exists as a response to high information and contract enforcement costs. Whether it encourages looting depends on other institutions, particularly those that create incentives to monitor directors. We examine Mexico's banking system, 1888–1913, in which there was widespread related lending. We find little evidence of credit misallocation despite a financial crisis and government-organized rescue.

Keywords: Crime and Corruption; Developing Countries and Economies; Financial Crisis; Financing and Loans; History; Business and Shareholder Relations; Banking Industry; Mexico;

Citation:

Maurer, Noel, and Stephen Haber. "Related Lending and Economic Performance: Evidence from Mexico." Journal of Economic History 67, no. 3 (September 2007): 551–581.