Cosigners as Collateral

Stefan Klonner () and Ashok Rai
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Ashok Rai: Williams College, http://econ.williams.edu

No 2008-04, Department of Economics Working Papers from Department of Economics, Williams College

Abstract: We investigate the role of cosigners as collateral using data from a South Indian financial institution. Using an exogenous change in the cosigner requirement, we establish a negative causal effect of cosigners on defaults: an increase in the number of cosigners reduces defaults all these equal. Our results suggest that a one-sixth increase in the number of cosigners reduces the incidence of a default by 7.5 percent. While most theories of collateral predict that increased cosigners will reduce defaults, we are first to find empirical evidence of this effect.

Keywords: credit; default; cosigner; rosca (search for similar items in EconPapers)
JEL-codes: O16 D82 G21 (search for similar items in EconPapers)
Date: 2008-05

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