Reciprocity and Reputation on Credit Market: Experimental Evidence
This paper reports the results of an experiment that investigates the effects of reciprocity and reputation on credit market performance. To do so, we replicate the three treatments carried out by Fehr and Zehnder (2005) in their experiment and introduce some alterations. More precisely, in our experiment, participants are matched by pairs exogenously so they have the opportunity of reputation building. Furthermore, our experiment allows us to investigate the effect of information on reputation building. In the first treatment called partner no information a lender and a borrower are matched for the all duration of the experiment. The second treatment (stranger no information) is identical to the previous one except that it is played under a stranger matching protocol. The third treatment (partner information) solely differs from the first one by the fact that the lenders have access to the project selected by the borrowers and the project outcome. The last treatment (Third party no information) allows for the introduction of a third party in charge of enforcing the contracts whereas in the three conditions aforementioned the contracts are not enforceable by an exogenous force. Our results show that an honour-based market – wherein participants cannot build up long term relationship – is not viable on the long run because borrowers have no repayment incentives, though a significant fraction of borrowers reciprocate fair offers. The opportunity to engage bilateral long term relationships strongly improves the market performance by partially mitigating the repayment problem and thus enhancing cooperation between borrowers and lenders. The latter succeed in applying a conditional contract renewal strategy. As a consequence selfish borrowers have an incentive to behave reciprocally. Surprisingly, rendering the information symmetric and transparent between the two parties involved does not improve market performance. This fact seems to highlight the prominence of reputation as a disciplining devise. The presence of an exogenous force in charge of enforcing contract undeniably improves the credit market functioning by solving the repayment problem and thus giving more confidence to the investors but also exacerbates moral hazard associated with project selection. Interestingly, the fact that lenders offer fair financing conditions significantly lowers moral hazard
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||Sep 2008|
|Publication status:||Published in ESA Regional Meeting, Sep 2008, Lyon, France|
|Note:||View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00359099|
|Contact details of provider:|| Web page: https://hal.archives-ouvertes.fr/|
When requesting a correction, please mention this item's handle: RePEc:hal:journl:halshs-00359099. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.