Savings-and-Credit Contracts

46 Pages Posted: 19 Sep 2024

See all articles by Janis Skrastins

Janis Skrastins

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

Armando R. Gomes

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

Bernardus Ferdinandus Nazar Van Doornik

Government of the Federative Republic of Brazil - Central Bank of Brazil

David Schoenherr

Seoul National University - College of Business Administration; European Corporate Governance Institute (ECGI)

Date Written: April 20, 2023

Abstract

In this paper, we present a Savings-and-Credit Contract (SCC) design that mandates a savings period with a default penalty before providing credit. We demonstrate that SCCs mitigate adverse selection and can outperform traditional loan contracts amidst information frictions, thereby expanding access to credit. Empirical evidence from a financial product incorporating an SCC design supports our theory. While appearing riskier on observables, we observe lower realized default rates for product participants than for bank borrowers. Further consistent with the theory, a reform that reduces the default penalty during the savings period induces worse selection and higher realized default rates.

Keywords: contract design, information asymmetry, signaling, access to credit

JEL Classification: D47, G21, G23, G51, J61

Suggested Citation

Skrastins, Janis and Gomes, Armando R. and Gomes, Armando R. and Doornik, Bernardus Ferdinandus Nazar Van and Schoenherr, David, Savings-and-Credit Contracts (April 20, 2023). Available at SSRN: https://ssrn.com/abstract=4931994 or http://dx.doi.org/10.2139/ssrn.4931994

Janis Skrastins (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

Armando R. Gomes

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

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-4569 (Phone)

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

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-4569 (Phone)

Bernardus Ferdinandus Nazar Van Doornik

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

David Schoenherr

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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