Communication, Credit Provision and Loan Repayment:: Evidence from a Person-to-Person Lending Experiment
Series
School of Finance Working Paper Series
Type
working paper
Date Issued
2018
Author(s)
Abstract
We report the results of a laboratory experiment which examines the impact of pre-contractual communication in person-to-person lending. We show that potential hidden action undermines the positive effect of communication on repayment behavior and credit provision. When strategic defaults by borrowers are revealed to lenders, pre-contractual communication reduces strategic default and increases credit provision. When strategic defaults are hidden behind a veil of uncertainty, we find a substantially weaker impact of communication. Borrowers are more likely to renege on repayment promises when they can hide opportunistic behavior from lenders. These findings have important implications for the design of lending relationships and procedures: Pre-contractual communication and post-contractual monitoring go hand in hand.
Language
English
Keywords
Strategic Default
Communication
Trust Game
HSG Classification
contribution to scientific community
HSG Profile Area
SOF - System-wide Risk in the Financial System
Publisher
SoF-HSG
Volume
2018
Number
2018/19
Pages
108
Contact Email Address
martin.brown@unisg.ch
Eprints ID
255016
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open.access
Name
18_19_Brown et al_Communication and Hidden Action_20200831.pdf
Size
1.56 MB
Format
Adobe PDF
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