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Lending to the Unbanked: Relational Contracting with Loan Sharks

Author

Listed:
  • Kevin Lang
  • Kaiwen Leong
  • Huailu Li
  • Haibo Xu

Abstract

We study roughly 11,000 loans from unlicensed moneylenders to over 1,000 borrowers in Singapore and provide basic information about this understudied market. Borrowers frequently expect to repay late. While lenders do rely on additional punishments to enforce loans, the primary cost of not repaying on time is compounding of a very high interest rate. We develop a very simple model of the relational contract between loan sharks and borrowers and use it to predict the effect of a crackdown on illegal moneylending. Consistent with our model, the crackdown raised the interest rate and lowered the size of loans.

Suggested Citation

  • Kevin Lang & Kaiwen Leong & Huailu Li & Haibo Xu, 2019. "Lending to the Unbanked: Relational Contracting with Loan Sharks," NBER Working Papers 26400, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26400
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    More about this item

    JEL classification:

    • I28 - Health, Education, and Welfare - - Education - - - Government Policy
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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