Raghuram Rajan: belief

Transcript context

…In the United States, are current financial and lending connections too relationship based? Again, going back to your earlier work. My coauthor, Luigi Zingales, would say there’s a lot more connections that work today than is healthy. I would say that modern business operates in a mix of both arm’s-length contracts, as well as relationships that fill the gaps in these contracts. I don’t think relationships are necessarily bad if they are a way of enforcing trust, of adhering to terms that are not precisely written in the contract. You do business with somebody else because, broadly, you think they will do the right thing. They won’t haul you to court anytime there’s any sense of discrepancy. I think that’s how business works. And that’s usually a good thing. It’s when those relationships become the only way of actually functioning that you restrict access to a narrow circle of friends and relatives. That’s when it becomes problematic. Can narrow banking proposals work?…

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