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Trust and Lending: An Experimental Study

Author

Listed:
  • Kyle Hyndman

    (Naveen Jindal School of Management, University of Texas at Dallas, 800 W. Campbell Rd., Richardson, TX 75080, USA)

  • Jiabin Wu

    (Department of Economics, University of Oregon, Eugene, OR 97403, USA)

  • Steven Chong Xiao

    (Naveen Jindal School of Management, University of Texas at Dallas, 800 W. Campbell Rd., Richardson, TX 75080, USA)

Abstract

This paper investigates the importance and the determinants of trust in a lending situation using a controlled experiment. We find that communication can facilitate collaboration between lenders and borrowers through three channels of trust: (1) an information channel, (2) a preference channel, and (3) a reciprocity channel. Our results highlight the role of trust in mitigating the moral hazard problem in lending.

Suggested Citation

  • Kyle Hyndman & Jiabin Wu & Steven Chong Xiao, 2024. "Trust and Lending: An Experimental Study," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 14(02), pages 1-39, June.
    • Handle: RePEc:wsi:qjfxxx:v:14:y:2024:i:02:n:s2010139224400044
    DOI: 10.1142/S2010139224400044
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    More about this item

    Keywords

    Behavioral finance; trust; lending; financial risks; banking; credit markets; experimental economics;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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