Shame shared is shame halved: The peer effect on consumer credit default choice

Abstract

We examine the peer effects of default decisions in consumer credit. Many unsecured lending platforms, particularly in emerging economies, notify borrowers’ social circles during debt collection to curb high default rates. Leveraging the randomness in default notifications, we mitigate endogeneity concerns and identify peer influence. Our findings reveal a negative spillover effect: each additional peer who defaults before a borrower’s repayment decision increases the borrower’s default likelihood by 41%. However, peers defaulting after the borrower show no such correlation. We further demonstrate that social stigma and peer learning shape default behavior. While social shaming has traditionally reinforced compliance, our study highlights an unintended consequence—amplifying shared shame may increase rather than deter defaults.

Keywords: peer effect, default decision, digital platform, social stigma, Fintech

JEL Classification: D14, G41, G21