Communication, Credit Provision and Loan Repayment:: Evidence from a Person-to-Person Lending Experiment

Item Type Monograph (Working Paper)
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.

Authors Brown, Martin; Schmitz, Jan & Zehnder, Christian
Language English
Keywords Strategic Default, Communication, Trust Game
Subjects economics
finance
HSG Classification contribution to scientific community
HSG Profile Area SOF - System-wide Risk in the Financial System
Date 2018
Publisher SoF-HSG
Series Name School of Finance Working Paper Series
Volume 2018
Number 2018/19
Number of Pages 108
Contact Email Address martin.brown@unisg.ch
Depositing User Beatrix Kobelt-Glock
Date Deposited 18 Sep 2018 07:36
Last Modified 07 Sep 2020 12:52
URI: https://www.alexandria.unisg.ch/publications/255016

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Citation

Brown, Martin; Schmitz, Jan & Zehnder, Christian: Communication, Credit Provision and Loan Repayment:: Evidence from a Person-to-Person Lending Experiment. School of Finance Working Paper Series, 2018, 2018/19.

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https://www.alexandria.unisg.ch/id/eprint/255016
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