Digital Collateral

83 Pages Posted: 10 Apr 2021 Last revised: 3 Jan 2024

See all articles by Paul J. Gertler

Paul J. Gertler

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER)

Brett Green

Washington University in St. Louis - John M. Olin Business School

Catherine Wolfram

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 8, 2023

Abstract

A new form of secured lending using “digital collateral” has recently emerged, most prominently in low- and middle-income countries. Digital collateral relies on lockout technology, which allows the lender to temporarily disable the flow value of the collateral to the borrower without physically repossessing it. We explore this new form of credit in a model and a field experiment using school-fee loans digitally secured with a solar home system. Securing a loan with digital collateral drastically reduced default rates (by 19 pp) and increased the lender’s rate of return (by 49 pp). Employing a variant of the Karlan and Zinman (2009) methodology, we decompose the total effect on repayment and find that roughly two-thirds is attributable to moral hazard, and one-third is attributable to adverse selection. In addition, access to digitally secured school-fee loans significantly increased school enrollment and school-related expenditures without detrimental effects on households’ balance sheets.

Keywords: Collateralized Lending, Microfinance, Moral Hazard, Adverse Selection, Education

JEL Classification: G20, I22, O16

Suggested Citation

Gertler, Paul J. and Green, Brett and Wolfram, Catherine, Digital Collateral (December 8, 2023). Olin Business School Center for Finance & Accounting Research Paper No. Forthcoming, Available at SSRN: https://ssrn.com/abstract=3821998 or http://dx.doi.org/10.2139/ssrn.3821998

Paul J. Gertler

University of California, Berkeley - Haas School of Business ( email )

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Brett Green (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

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Catherine Wolfram

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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United States

National Bureau of Economic Research (NBER)

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