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Lending without creditor rights, collateral, or reputation: The "trusted assistant" loan in 19th century China

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  • Miao, Meng
  • Guanjie, Niu
  • Noe, Thomas

Abstract

This paper considers lending to finance projects in a setting where repayment enforcement appears impossible. The loan was illegal and thus legally unenforceable. Creditors were incapable of applying private coercion to force repayment. Borrowers lacked both collateral and reputation capital. Project cash flows were unobservable. The projects were the acquisition of Imperial administrative posts by scholars in nineteenth century Qing China. The lending mechanism was the "trusted-assistant loan." Our model of trusted-assistant lending shows that it is a renegotiation-proof implementation of efficient state dependent financing. Empirical analysis of officials' diaries and bank records shows that the employment of trusted-assistant lending and the performance of trusted-assistant loans conforms roughly with the model's predictions.

Suggested Citation

  • Miao, Meng & Guanjie, Niu & Noe, Thomas, 2017. "Lending without creditor rights, collateral, or reputation: The "trusted assistant" loan in 19th century China," BOFIT Discussion Papers 13/2017, Bank of Finland Institute for Emerging Economies (BOFIT).
    • Handle: RePEc:zbw:bofitp:bdp2017_013
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    JEL classification:

    • N25 - Economic History - - Financial Markets and Institutions - - - Asia including Middle East
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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