Digital Collateral

Paul Gertler, Brett Green and Catherine Wolfram

No 28724, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A new form of secured lending using “digital collateral” has recently emerged, most prominently in low- and middle-income countries. Digital collateral relies on lockout technology, which allows the lender to temporarily disable the flow value of the collateral to the borrower without physically repossessing it. We explore this new form of credit both in a model and in a field experiment using school-fee loans digitally secured with a solar home system. Securing a loan with digital collateral drastically reduces default rates (by 19 pp) and increases the lender’s rate of return (by 38 pp). Employing a variant of the Karlan and Zinman (2009) methodology, we decompose the total effect on repayment and find that roughly one-third is attributable to adverse selection, and two-thirds is attributable to moral hazard. In addition, access to digitally secured school-fee loans significantly increases school enrollment and school-related expenditures without detrimental effects to households’ balance sheet.

JEL-codes: G20 I22 O16 (search for similar items in EconPapers)
Date: 2021-04
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-fdg
Note: CF DEV ED
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Published as Paul Gertler & Brett Green & Catherine Wolfram, 2024. "Digital Collateral," The Quarterly Journal of Economics, vol 139(3), pages 1713-1766.

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