Trust in Lending

59 Pages Posted: 15 Jul 2018 Last revised: 15 Mar 2019

See all articles by Richard T. Thakor

Richard T. Thakor

University of Minnesota - Carlson School of Management

Robert C. Merton

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Harvard Business School - Finance Unit

Multiple version iconThere are 2 versions of this paper

Date Written: June 23, 2018

Abstract

We develop a theory of trust in lending, distinguishing between trust and reputation, and use it to analyze the competitive interactions between banks and non-bank lenders (fintech firms). Trust enables lenders to have assured access to financing, whereas a loss of investor trust makes this access conditional on market conditions and lender reputation. Banks endogenously have stronger incentives to maintain trust. When borrower defaults erode trust in lenders, banks are able to survive the erosion of trust when fintech lenders do not. Trust is also asymmetric in nature — it is more difficult to gain it than to lose it.

Keywords: Trust, Banks, Non-banks, Fintech, Lending, Financial Intermediation, Credit Market, Financial Crisis

JEL Classification: E44, E51, E52, G21, G23, G28, H12, H81

Suggested Citation

Thakor, Richard T. and Merton, Robert C., Trust in Lending (June 23, 2018). MIT Sloan Research Paper No. 5524-18; 9th Miami Behavioral Finance Conference 2018. Available at SSRN: https://ssrn.com/abstract=3201689 or http://dx.doi.org/10.2139/ssrn.3201689

Richard T. Thakor (Contact Author)

University of Minnesota - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Robert C. Merton

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Avenue
E62-634
Cambridge, MA 02139-4307
United States
617 715 4866 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6678 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
218
Abstract Views
715
rank
124,164
PlumX Metrics