Trust and Lending: An Experimental Study

Kyle Hyndman (), Jiabin Wu () and Steven Chong Xiao
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Kyle Hyndman: Naveen Jindal School of Management, University of Texas at Dallas, 800 W. Campbell Rd., Richardson, TX 75080, USA
Jiabin Wu: Department of Economics, University of Oregon, Eugene, OR 97403, USA
Steven Chong Xiao: Naveen Jindal School of Management, University of Texas at Dallas, 800 W. Campbell Rd., Richardson, TX 75080, USA

Quarterly Journal of Finance (QJF), 2024, vol. 14, issue 02, 1-39

Abstract: This paper investigates the importance and the determinants of trust in a lending situation using a controlled experiment. We find that communication can facilitate collaboration between lenders and borrowers through three channels of trust: (1) an information channel, (2) a preference channel, and (3) a reciprocity channel. Our results highlight the role of trust in mitigating the moral hazard problem in lending.

Keywords: Behavioral finance; trust; lending; financial risks; banking; credit markets; experimental economics (search for similar items in EconPapers)
JEL-codes: C90 G21 G32 G41 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1142/S2010139224400044

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