Digital Collateral

77 Pages Posted: 10 Apr 2021 Last revised: 9 Mar 2022

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 D. Wolfram

University of California, Berkeley - Economic Analysis & Policy Group; National Bureau of Economic Research (NBER)

Date Written: March 9, 2022

Abstract

A new form of secured lending utilizing “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 both in a model and in a field experiment using school-fee loans digitally secured with a solar home system. We find that securing a loan with digital collateral drastically reduces default rates (by 19 pp) and increases the lender’s rate of return (by 38 pp). Employing a variant of the Karlan and Zinman (2009) methodology, we decompose the total effect on repayment and find that roughly one-third is attributable to adverse selection and two-thirds is attributable to moral hazard. In addition, we find that access to digitally-secured school-fee loans significantly increases school enrollment (by 8 pp) and school-related expenditures (by 42%) without detrimental effects to households’ balance sheet.

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 D., Digital Collateral (March 9, 2022). 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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National Bureau of Economic Research (NBER)

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Brett Green (Contact Author)

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

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Catherine D. Wolfram

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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