Savings-and-credit contracts

Bernardus F Nazar Van Doornik, Armando Gomes, David Schoenherr and Janis Skrastins

No 1236, BIS Working Papers from Bank for International Settlements

Abstract: In this paper, we present a savings-and-credit contract (SCC) design that mandates a savings period with a default penalty before providing credit. We demonstrate that SCCs mitigate adverse selection and can outperform traditional loan contracts amidst information frictions, thereby expanding access to credit. Empirical evidence from a financial product incorporating an SCC design supports our theory. While appearing riskier on observables, we observe lower realized default rates for product participants than for bank borrowers. Further consistent with the theory, a reform that reduces the default penalty during the savings period induces worse selection and higher realized default rates.

Keywords: access to credit; contract design; information asymmetry; signaling (search for similar items in EconPapers)
JEL-codes: D47 G21 G23 G51 J61 (search for similar items in EconPapers)
Date: 2024-12
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