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Borrowing in an Illegal Market: Contracting with Loan Sharks

Author

Listed:
  • Kevin Lang

    (Boston University)

  • Kaiwen Leong

    (Griffith University)

  • Huailu Li

    (Fudan University; National University of Singapore)

  • Haibo Xu

    (University of Nottingham Ningbo China)

Abstract

Using over 11,000 unlicensed loans to over 1,000 borrowers in Singapore, we provide basic information about an understudied market: illegal moneylending. Borrowers and lenders interact frequently and rely primarily on relational contracts to enforce their agreements. Borrowers have high discount rates, often have gambling and/or substance abuse problems, and often repay late. While lenders sometimes resort to nonfinancial punishments, the primary cost of late repayment is the compounding of a very high interest rate. Consistent with our view that lenders cannot extract all surplus, a crackdown on illegal lending raised interest rates and lowered the size of loans.

Suggested Citation

  • Kevin Lang & Kaiwen Leong & Huailu Li & Haibo Xu, 2025. "Borrowing in an Illegal Market: Contracting with Loan Sharks," The Review of Economics and Statistics, MIT Press, vol. 107(1), pages 269-278, January.
    • Handle: RePEc:tpr:restat:v:107:y:2025:i:1:p:269-278
    DOI: 10.1162/rest_a_01246
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