Digital Collateral

74 Pages Posted: 3 May 2021 Last revised: 9 May 2021

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)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2021

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 and find that roughly one-third is attributable to (ex-ante) adverse selection and two-thirds is attributable to (interim or ex-post) moral hazard. Access to a school-fee loan significantly increases school enrollment and school-related expenditures without detrimental effects to households’ balance sheet.

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Suggested Citation

Gertler, Paul J. and Green, Brett and Wolfram, Catherine D., Digital Collateral (April 2021). NBER Working Paper No. w28724, Available at SSRN: https://ssrn.com/abstract=3838471

Paul J. Gertler (Contact Author)

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

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Brett Green

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

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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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