The Conflict Induced Costs of Lending
78 Pages Posted: 26 Jun 2020 Last revised: 7 Jun 2022
Date Written: June 23, 2020
We study the effect of armed conflict on loan officers and their actual lending decisions. Following mortar shelling, which initially occurs locally but then repeats, loan rates set by loan officers surpass the levels in comparable locales in border areas where shelling has become routine. We depict that the channel through which this occurs is the distortion of loan officers’ beliefs. Simultaneously, the dispersion of loan rates decreases suggesting a hardening of the beliefs about the new normal of being shelled recurringly. Hence, the real costs of armed conflict through credit markets are substantially large and potentially harmful for borrowers.
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