Communication and Hidden Action: Evidence from a Person-to-Person Lending Experiment
49 Pages Posted: 6 Sep 2018 Last revised: 9 Jan 2019
Date Written: December 20, 2018
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: Suggested Citation