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Communication, Credit Provision and Loan Repayment: Evidence from a Person-to-Person Lending Experiment

Martin Brown, Jan Schmitz and Christian Zehnder ()

No 1819, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: We report the results of a laboratory experiment which examines the impact of precontractual communication in person-to-person lending. We show that potential hidden action undermines the positive effect of communication on repayment behavior and credit provision. When strategic defaults are hidden behind a veil of uncertainty, we find a substantially weaker impact of communication. Borrowers are more likely to renege on repayment promises when they can hide opportunistic behavior from lenders. These findings have important implications for the design of lending relationships and procedures: Pre-contractual communication and post-contractual monitoring go hand in hand.

Keywords: Strategic Default; Communication; Trust Game; Relationship Lending (search for similar items in EconPapers)
JEL-codes: C91 G01 G02 (search for similar items in EconPapers)
Pages: 107 pages
Date: 2018-08, Revised 2020-08
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-gth
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Handle: RePEc:usg:sfwpfi:2018:19