Citations (3)



Financing from Family and Friends

Samuel Lee

Santa Clara University - Leavey School of Business; European Corporate Governance Institute (ECGI)

Petra Persson

Stanford University; Research Institute of Industrial Economics (IFN)

September 10, 2015

NYU Stern Working Paper FIN-12-007
IFN Working Paper No. 933
ECGI - Finance Working Paper No. 358

The majority of informal finance, in developed and developing countries, is provided by family and friends. Yet existing models of informal finance better fit “informal moneylenders” insomuch as they fail to match two salient characteristics of family finance: family investors often accept below-market or even negative returns, and despite this, borrowers tend to prefer formal finance. We explain both of these characteristics in a model of external financing that allows for social preferences between relatives or friends. The social preferences make family finance cheap but also create shadow costs that nonetheless discourage its use: Committing family funds to a risky investment crowds out familial transfers in low-consumption states, and undermines limited liability. The very characteristics that generate intra-family insurance thus render family finance a poor source of risk capital. In contexts where contracts must harness social ties to overcome capital constraints, our findings suggest that third-party intermediation and semi-formalization may be crucial for promoting risky investment. This is relevant to the limited success of group-based microfinance in generating entrepreneurial growth, and to the emergence of social lending intermediaries and crowd funding.

Number of Pages in PDF File: 52

Keywords: Informal finance, family loans, peer-to-peer lending, small business lending, entrepreneurial finance, microfinance, missing middle, financing gap, risk capital, social ties, altruism, social collateral

JEL Classification: G32, G21, O16, O17, D19, D64

Open PDF in Browser Download This Paper

Date posted: June 19, 2012 ; Last revised: September 11, 2015

Suggested Citation

Lee, Samuel and Persson, Petra, Financing from Family and Friends (September 10, 2015). IFN Working Paper No. 933; NYU Stern Working Paper FIN-12-007; IFN Working Paper No. 933; ECGI - Finance Working Paper No. 358. Available at SSRN: http://ssrn.com/abstract=2086625 or http://dx.doi.org/10.2139/ssrn.2086625

Contact Information

Samuel Lee (Contact Author)
Santa Clara University - Leavey School of Business
500 El Camino Real
Santa Clara, CA California 95053
United States
European Corporate Governance Institute (ECGI) ( email )
B-1050 Brussels
Petra Persson
Stanford University ( email )
Stanford, CA 94305
United States
Research Institute of Industrial Economics (IFN) ( email )
Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Feedback to SSRN

Paper statistics
Abstract Views: 3,936
Downloads: 724
Download Rank: 17,257
Citations:  3
People who downloaded this paper also downloaded:
1. Peer-to-Peer Lending to Small Businesses
By Traci Mach, Courtney Carter, ...

Paper comments
No comments have been made on this paper

© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo4 in 0.407 seconds