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Financial Trust in Social Economic Network and Credit Risk

Author

Listed:
  • Muduli, Silu
  • Dash, Shridhar Kumar

Abstract

Paper models lender’s decision based on project riskiness, trust from borrower’s socioeconomic network, and social cost of default for the borrower. The paper suggests a methodology to estimate aggregate level of trustworthiness of borrower in socio-economic network. Our model links the social cost of default to credit default. A relatively safer project executed by a borrower with lower social cost of default is likely to be a willful defaulter. Similarly, relatively safer project executed by a borrower with high social cost of default is likely to pay-back the loan.

Suggested Citation

  • Muduli, Silu & Dash, Shridhar Kumar, 2019. "Financial Trust in Social Economic Network and Credit Risk," EconStor Preprints 190918, ZBW - Leibniz Information Centre for Economics.
  • Handle: RePEc:zbw:esprep:190918
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    File URL: https://www.econstor.eu/bitstream/10419/190918/1/P1-Financial-trust-in-network-and-credit-risk.pdf
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    References listed on IDEAS

    as
    1. Moro, Andrea & Fink, Matthias, 2013. "Loan managers’ trust and credit access for SMEs," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 927-936.
    2. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2004. "The Role of Social Capital in Financial Development," American Economic Review, American Economic Association, vol. 94(3), pages 526-556, June.
    3. van Bastelaer, Thierry & Leathers, Howard, 2006. "Trust in Lending: Social Capital and Joint Liability Seed Loans in Southern Zambia," World Development, Elsevier, vol. 34(10), pages 1788-1807, October.
    4. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-1087, September.
    5. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    6. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Social Economic Network; Trust; Credit Risk;

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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