Is cheap talk just empty words? The signalling value of voluntary promises for loan repayment

Xiaotong Lun, Xiangyi Meng and Jin Xu

Applied Economics Letters, 2024, vol. 31, issue 17, 1737-1741

Abstract: When a loan applicant voluntarily makes a repayment promise, is it a valuable signal of his/her future repayment behaviour? Cheap talk models have demonstrated the informativeness of promises. We use a unique dataset from a direct lender in China to show that such cheap talk is informative: among new borrowers, those making voluntary promises are more likely to repay than those making no promises, whereas among returning borrowers, those making voluntary promises have a higher likelihood of default than those making no promises.

Date: 2024
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DOI: 10.1080/13504851.2023.2206608

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