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Digital Collateral

Author

Listed:
  • Paul Gertler
  • Brett Green
  • Catherine Wolfram

Abstract

A new form of secured lending using “digital collateral” has recently emerged, most prominently in low- and middle-income countries. Digital collateral relies on lockout technology, which allows the lender to temporarily disable the flow value of the collateral to the borrower without physically repossessing it. We explore this new form of credit both in a model and in a field experiment using school-fee loans digitally secured with a solar home system. Securing a loan with digital collateral drastically reduces default rates (by 19 pp) and increases the lender’s rate of return (by 38 pp). Employing a variant of the Karlan and Zinman (2009) methodology, we decompose the total effect on repayment and find that roughly one-third is attributable to adverse selection, and two-thirds is attributable to moral hazard. In addition, access to digitally secured school-fee loans significantly increases school enrollment and school-related expenditures without detrimental effects to households’ balance sheet.

Suggested Citation

  • Paul Gertler & Brett Green & Catherine Wolfram, 2021. "Digital Collateral," NBER Working Papers 28724, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28724
    Note: CF DEV ED
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    File URL: http://www.nber.org/papers/w28724.pdf
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    More about this item

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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