Angry Borrowers: Negative Reciprocity in a Financial Market
54 Pages Posted: 9 Jul 2019 Last revised: 5 Dec 2020
Date Written: April 15, 2020
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: Suggested Citation