| Credit contracts are often non-exclusive. A string of theoretical papers shows that non-exclusivity generates important negative contractual externalities. Employing a unique dataset, we identify how the contractual externality stemming from the non-exclusivity of credit contracts affects credit supply. In particular, using bank internal information on a bank’s willingness to supply loans, we find that a bank reduces its loan supply when a borrower initiates a lending relationship at another bank. The effect is more pronounced the larger the loans from the other bank and the larger borrower’s probability of default. Instead, the bank’s reaction is completely mitigated when its claims are protected via a special priority right. |
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