Angry Borrowers: Negative Reciprocity in a Financial Market

54 Pages Posted: 9 Jul 2019 Last revised: 5 Dec 2020

See all articles by Li Liao

Li Liao

Tsinghua University - PBC School of Finance

Zhengwei Wang

Tsinghua University - PBC School of Finance

Hongjun Yan

DePaul University

Jun Yang

Indiana University - Kelley School of Business - Department of Finance

Congyi Zhou

Tsinghua University, PBC School of Finance, Students

Date Written: April 15, 2020

Abstract

Reciprocity is believed to play an important role in a variety of key areas in economics. However, most research on this topic is experimental, perhaps due to the difficulty in measuring reciprocity in the field. This paper provides the first direct evidence on reciprocity in a real financial market. We examine the consequences of an intrusive debt-collection tactic that targets delinquent borrowers’ social circles in a consumer-lending setting. The practice emerged recently in developing economies, and some U.S. lenders have used it as well. Our identification strategy relies on the fact that debt-collection agents typically had an excessive workload and could not work on all of their assigned loans before calling it a day. Around the “stopping time,” whether a loan was worked on (treated) depended on random factors that determined collection agents’ schedules. Our estimation shows that this intrusive debt-collection tactic backfired and increased the default rate by 5.9 to 14.3 percentage points. Borrowers appeared to be angered by the unexpected intrusion to their social circles and retaliated by defaulting on their loans even though they might have been able to repay. This effect is stronger for male borrowers and for borrowers with access to alternative financing sources. It is concentrated in the early period when this collection practice was emerging and likely unexpected.

Keywords: Reciprocity; Privacy Infringement; Social Pressure; Debt Collection

JEL Classification: D14, D18, G41

Suggested Citation

Liao, Li and Wang, Zhengwei and Yan, Hongjun and Yang, Jun and Zhou, Congyi, Angry Borrowers: Negative Reciprocity in a Financial Market (April 15, 2020). PBCSF-NIFR Research Paper, Available at SSRN: https://ssrn.com/abstract=3415808 or http://dx.doi.org/10.2139/ssrn.3415808

Li Liao

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Zhengwei Wang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China

Hongjun Yan

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

HOME PAGE: http://sites.google.com/site/hongjunyanhomepage/

Jun Yang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3395 (Phone)
812-855-5875 (Fax)

Congyi Zhou (Contact Author)

Tsinghua University, PBC School of Finance, Students ( email )

No. 43, Chengdu Road
Beijing 100083
China

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