Trust in Lending

59 Pages Posted: 13 Jul 2018

See all articles by Richard T. Thakor

Richard T. Thakor

University of Minnesota - Carlson School of Management; Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Robert C. Merton

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

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Date Written: June 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.

Suggested Citation

Thakor, Richard T. and Merton, Robert C., Trust in Lending (June 2018). NBER Working Paper No. w24778. Available at SSRN: https://ssrn.com/abstract=3210412

Richard T. Thakor (Contact Author)

University of Minnesota - Carlson School of Management ( email )

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Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

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Robert C. Merton

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

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National Bureau of Economic Research (NBER)

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Harvard Business School - Finance Unit ( email )

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