Communication and Hidden Action: Evidence from a Person-to-Person Lending Experiment

49 Pages Posted: 6 Sep 2018 Last revised: 9 Jan 2019

See all articles by Martin Brown

Martin Brown

University of St. Gallen

Jan Schmitz

ETH Zurich

Christian Zehnder

University of Lausanne

Date Written: December 20, 2018

Abstract

We report the results of a laboratory experiment which examines the impact of precontractual communication in person-to-person lending. We show that potential hidden action undermines the positive effect of communication on repayment behavior and credit provision. In our baseline condition, where strategic defaults by borrowers are revealed to lenders, pre-contractual communication reduces strategic default and increases credit provision. In our main condition, where strategic defaults are hidden behind a veil of uncertainty, we find a substantially weaker impact of communication. Borrowers are more likely to renege on repayment promises when they can hide opportunistic behavior from lenders.

Keywords: Strategic Default, Communication, Trust Game

JEL Classification: G21, G41, C91

Suggested Citation

Brown, Martin and Schmitz, Jan and Zehnder, Christian, Communication and Hidden Action: Evidence from a Person-to-Person Lending Experiment (December 20, 2018). University of St.Gallen, School of Finance Research Paper No. 2018/19. Available at SSRN: https://ssrn.com/abstract=3245158 or http://dx.doi.org/10.2139/ssrn.3245158

Martin Brown (Contact Author)

University of St. Gallen ( email )

Unterer Graben 21
St. Gallen, CH-9000
Switzerland

Jan Schmitz

ETH Zurich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Christian Zehnder

University of Lausanne ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

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