2006 Reports

Reciprocity and Network Coordination: Evidence from Japanese Banks

Eser, Zekeriya; Peek, Joe

In this study, we provide the first detailed empirical evidence on the cooperative behavior of individual members of a functioning, real world network. In contrast to experimental evidence from limited settings, our study employs detailed data on the volume of loans given to individual firms from each individual bank that lends to them at an annual frequency for nearly 20 years. Using this detailed data, we are able to exploit substantial cross-sectional variation in the degree of reliance of the banks on the network as a whole and on other individual banks within the network. In addition, we are able to investigate the impact of economic stress on the cooperative behavior of individual network members by comparing the 1980s with the more turbulent 1990s. We find strong evidence that the strength of system-wide reliance on, and thus commitment to, the network, as well as pairwise reliance on other network members, plays an important role in explaining the observed cooperative behavior by Japanese banks.