Communication and hidden action: evidence from a person-to-person lending experiment

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Guest speakerMartin BrownProfessor of Banking at the University of St. Gallen.

Seminar Topic: 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. In our baseline condition, where strategic defaults by borrowers are revealedto lenders, pre-contractual communication reduces strategic default and increases credit provision. In our main condition, where 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.

Speaker BioMartin Brown is Professor of Banking at the University of St.Gallen, Switzerland. Prior to this he worked as Senior Economist at the Swiss National Bank, Associate Professor of Finance at Tilburg University and as a consultant and project manager for financial sector development and small business promotion in Africa, Asia and Eastern Europe. His research has focused on financial intermediation, household finance and organizational economics. His recent work examines household credit and deposit behavior, as well as the organizational economics of banks.