Trust in Lending

Richard Thakor and Robert Merton

No 24778, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a theory of trust in lending, distinguishing between trust and reputation, and use it to analyze the competitive interactions between banks and non-bank lenders (fintech firms). Trust enables lenders to have assured access to financing, whereas a loss of investor trust makes this access conditional on market conditions and lender reputation. Banks endogenously have stronger incentives to maintain trust. When borrower defaults erode trust in lenders, banks are able to survive the erosion of trust when fintech lenders do not. Trust is also asymmetric in nature—it is more difficult to gain it than to lose it.

JEL-codes: E44 E51 E52 G21 G23 G28 H12 H81 (search for similar items in EconPapers)
Date: 2018-06
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-mac, nep-pay and nep-soc
Note: CF ME
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Citations: View citations in EconPapers (11)

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