Trust and Credit

60 Pages Posted: 16 Feb 2009 Last revised: 4 Aug 2010

Jefferson Duarte

Rice University

Stephan Siegel

University of Washington - Michael G. Foster School of Business

Lance A. Young

University of Washington - Department of Finance and Business Economics

Date Written: June 2, 2010

Abstract

This study examines empirically whether individuals consider their perceptions of potential counterparties' trustworthiness when deciding to transact in an environment with extensive contract enforcement mechanisms. This is a non-trivial empirical question because, as observed by Carlin, Dorobantu, and Viswanathan (2009), in the presence of adequate contracts and enforcement mechanisms, trust need not affect market outcomes at all. We find that borrowers who are perceived as less trustworthy are economically and significantly less likely to have their loan requests filled. This result provides support to a growing literature in finance that suggests that trust could play a causal role in stock market participation, the lack of diversification in investors' asset allocation, as well as the pattern of cross-border investments.

Keywords: Trust, information asymmetry, consumer credit, peer-to-peer lending

JEL Classification: D81, D83, G21

Suggested Citation

Duarte, Jefferson and Siegel, Stephan and Young, Lance A., Trust and Credit (June 2, 2010). AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1343275 or http://dx.doi.org/10.2139/ssrn.1343275

Jefferson Duarte

Rice University ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States
713.3486137 (Phone)

Stephan Siegel (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

HOME PAGE: http://faculty.washington.edu/ss1110/

Lance A. Young

University of Washington - Department of Finance and Business Economics ( email )

Box 353200
Seattle, WA 98195
United States

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