The Conflict Induced Costs of Lending

Mrinal Mishra, Steven Ongena and Yushi Peng
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Mrinal Mishra: University of Zurich
Yushi Peng: Tilburg University

No 20-50, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study the effect of armed conflict on loan officers and their actual lending decisions. Following repeated incidences of mortar shelling, loan rates set by loan officers surpass the levels in comparable locales in border areas where shelling has become routine. Our empirical results and structural model depict that the channel through which this occurs is the distortion of loan officers’ beliefs. Simultaneously, the dispersion of loan rates decreases suggesting a hardening of the beliefs about the new normal of being shelled recurringly. Hence, the real costs of armed conflict through credit markets are substantial and potentially harmful for borrowers.

Pages: 86 pages
Date: 2020-06, Revised 2023-09
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2050

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