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

Author

Listed:
  • Martin Brown
  • Jan Schmitz
  • Christian Zehnder

Abstract

We report the results of a laboratory experiment which examines the impact of precontractual 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 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.

Suggested Citation

  • Martin Brown & Jan Schmitz & Christian Zehnder, 2018. "Communication, Credit Provision and Loan Repayment: Evidence from a Person-to-Person Lending Experiment," Working Papers on Finance 1819, University of St. Gallen, School of Finance, revised Aug 2020.
  • Handle: RePEc:usg:sfwpfi:2018:19
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    More about this item

    Keywords

    Strategic Default; Communication; Trust Game; Relationship Lending;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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