UNLICENSED MONEYLENDING MARKETS: RELATIONAL CONTRACTING BETWEEN BORROWERS AND GUARANTORS

Kaiwen Leong (), Dan Li (), Huailu Li () and Haibo Xu
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Kaiwen Leong: Division of Economics, Nanyang Technological University, Singapore
Dan Li: School of Economics, Fudan University, P. R. China
Huailu Li: School of Economics, Fudan University, P. R. China
Haibo Xu: School of Economics and Management, Tongji University, P. R. China

The Singapore Economic Review (SER), 2025, vol. 70, issue 03, 851-874

Abstract: Unlicensed moneylending is when an unlicensed individual, often called loan shark, lends money to another individual. We model the unlicensed moneylending market to analyze relational contracting between borrowers and guarantors. A guarantor repeatedly decides whether to act as the guarantor for a borrower, whereas the borrower repeatedly chooses a loan shark to borrow from and determines his effort in repaying loans. We show that the borrower starts by trying different loan sharks to learn about their forcefulness in collecting repayments and eventually only trades with those who are less forceful. Inefficient suspension or termination of relationship is necessary to discipline the borrower’s behavior when the parties are still uncertain about the loan sharks’ forcefulness, but can be avoided when the uncertainty is resolved. We also show in extensions that the borrower may increase his efforts over time as the relationship becomes more valuable to him, while the guarantor can resort to direct monitoring of the borrower’s effort as a substitute for the suspension or termination of relationship.

Keywords: Unlicensed moneylending; relational contracting; private information; guarantors (search for similar items in EconPapers)
JEL-codes: K42 L14 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1142/S0217590822500163

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