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Unlicensed Moneylending Markets: Relational Contracting Between Borrowers And Guarantors

Author

Listed:
  • KAIWEN LEONG

    (Division of Economics, Nanyang Technological University, Singapore)

  • DAN LI

    (School of Economics, Fudan University, P. R. China)

  • HUAILU LI

    (School of Economics, Fudan University, P. R. China)

  • HAIBO XU

    (School of Economics and Management, Tongji University, P. R. China)

Abstract

Unlicensed moneylending is when an unlicensed individual, often called loan shark, lends money to another individual. We model the unlicensed moneylending market to analyze relational contracting between borrowers and guarantors. A guarantor repeatedly decides whether to act as the guarantor for a borrower, whereas the borrower repeatedly chooses a loan shark to borrow from and determines his effort in repaying loans. We show that the borrower starts by trying different loan sharks to learn about their forcefulness in collecting repayments and eventually only trades with those who are less forceful. Inefficient suspension or termination of relationship is necessary to discipline the borrower’s behavior when the parties are still uncertain about the loan sharks’ forcefulness, but can be avoided when the uncertainty is resolved. We also show in extensions that the borrower may increase his efforts over time as the relationship becomes more valuable to him, while the guarantor can resort to direct monitoring of the borrower’s effort as a substitute for the suspension or termination of relationship.

Suggested Citation

  • Kaiwen Leong & Dan Li & Huailu Li & Haibo Xu, 2025. "Unlicensed Moneylending Markets: Relational Contracting Between Borrowers And Guarantors," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 70(03), pages 851-874, June.
    • Handle: RePEc:wsi:serxxx:v:70:y:2025:i:03:n:s0217590822500163
    DOI: 10.1142/S0217590822500163
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    More about this item

    Keywords

    Unlicensed moneylending; relational contracting; private information; guarantors;
    All these keywords.

    JEL classification:

    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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