IDEAS home Printed from https://ideas.repec.org/p/iza/izadps/dp13360.html
   My bibliography  Save this paper

Lending to the Unbanked: Relational Contracting with Loan Sharks

Author

Listed:
  • Lang, Kevin

    (Boston University)

  • Leong, Kaiwen

    (Nanyang Technological University, Singapore)

  • Li, Huailu

    (Fudan University, China)

  • Xu, Haibo

    (Tongji University)

Abstract

We study roughly 11,000 loans from unlicensed moneylenders to over 1,000 borrowers in Singapore and provide basic information about this understudied market. Borrowers frequently expect to repay late. While lenders do rely on additional punishments to enforce loans, the primary cost of not repaying on time is compounding of a very high interest rate. We develop a very simple model of the relational contract between loan sharks and borrowers and use it to predict the effect of a crackdown on illegal moneylending. Consistent with our model, the crackdown raised the interest rate and lowered the size of loans.

Suggested Citation

  • Lang, Kevin & Leong, Kaiwen & Li, Huailu & Xu, Haibo, 2020. "Lending to the Unbanked: Relational Contracting with Loan Sharks," IZA Discussion Papers 13360, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp13360
    as

    Download full text from publisher

    File URL: https://docs.iza.org/dp13360.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
    2. Parikshit Ghosh & Debraj Ray, 2016. "Information and Enforcement in Informal Credit Markets," Economica, London School of Economics and Political Science, vol. 83(329), pages 59-90, January.
    3. Marina Halac, 2012. "Relational Contracts and the Value of Relationships," American Economic Review, American Economic Association, vol. 102(2), pages 750-779, April.
    4. Stephen G. Donald & Kevin Lang, 2007. "Inference with Difference-in-Differences and Other Panel Data," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 221-233, May.
    5. William Fuchs, 2007. "Contracting with Repeated Moral Hazard and Private Evaluations," American Economic Review, American Economic Association, vol. 97(4), pages 1432-1448, September.
    6. Jin Li & Niko Matouschek, 2013. "Managing Conflicts in Relational Contracts," American Economic Review, American Economic Association, vol. 103(6), pages 2328-2351, October.
    7. Yared, Pierre, 2010. "A dynamic theory of war and peace," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1921-1950, September.
    8. Hagemann, Andreas, 2019. "Placebo inference on treatment effects when the number of clusters is small," Journal of Econometrics, Elsevier, vol. 213(1), pages 190-209.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Luis Garicano & Luis Rayo, 2016. "Why Organizations Fail: Models and Cases," Journal of Economic Literature, American Economic Association, vol. 54(1), pages 137-192, March.
    2. Francesc Dilmé & Daniel F. Garrett, 2023. "Relational Contracts: Public versus Private Savings," Econometrica, Econometric Society, vol. 91(3), pages 1025-1075, May.
    3. Juan‐José Ganuza & Fernando Gomez, 2022. "Designing relational sanctions in buyer–supplier relationships," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(2), pages 470-491, April.
    4. Herbold, Daniel & Schumacher, Heiner, 2020. "The agency costs of on-the-job search," Games and Economic Behavior, Elsevier, vol. 121(C), pages 435-452.
    5. Daniel Barron & Jin Li & Michał Zator, 2022. "Morale and Debt Dynamics," Management Science, INFORMS, vol. 68(6), pages 4496-4516, June.
    6. Fong, Yuk-fai & Li, Jin, 2017. "Relational contracts, limited liability, and employment dynamics," Journal of Economic Theory, Elsevier, vol. 169(C), pages 270-293.
    7. Jean Guillaume Forand & Jan Zapal, 2017. "The Demand and Supply of Favours in Dynamic Relationships," Working Papers 1705, University of Waterloo, Department of Economics, revised Sep 2017.
    8. Matthias Lang, 2023. "Stochastic contracts and subjective evaluations," RAND Journal of Economics, RAND Corporation, vol. 54(1), pages 104-134, March.
    9. James M. Malcomson, 2012. "Relational Incentive Contracts [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    10. Rocco Macchiavello & Ameet Morjaria, 2015. "The Value of Relationships: Evidence from a Supply Shock to Kenyan Rose Exports," American Economic Review, American Economic Association, vol. 105(9), pages 2911-2945, September.
    11. Grochulski, Borys & Zhang, Yuzhe, 2023. "Termination as an incentive device," Theoretical Economics, Econometric Society, vol. 18(1), January.
    12. Lang, Matthias, 2019. "Communicating subjective evaluations," Journal of Economic Theory, Elsevier, vol. 179(C), pages 163-199.
    13. Suehyun Kwon, 2016. "Relational contracts in a persistent environment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(1), pages 183-205, January.
    14. David A. Miller & Joel Watson, 2013. "A Theory of Disagreement in Repeated Games With Bargaining," Econometrica, Econometric Society, vol. 81(6), pages 2303-2350, November.
    15. Rocco Macchiavello & Ameet Morjaria, 2015. "The Value of Relationships: Evidence from a Supply Shock to Kenyan Rose Exports," American Economic Review, American Economic Association, vol. 105(9), pages 2911-2945, September.
    16. Matthias Fahn & Nicolas Klein, 2019. "Relational Contracts with Private Information on the Future Value of the Relationship: The Upside of Implicit Downsizing Costs," American Economic Journal: Microeconomics, American Economic Association, vol. 11(4), pages 33-58, November.
    17. Anil K. Jain, 2022. "Financing Repeat Borrowers: Designing Credible Incentives for Today and Tomorrow," International Finance Discussion Papers 1364, Board of Governors of the Federal Reserve System (U.S.).
    18. Ricard Gil & Giorgio Zanarone, 2018. "On the determinants and consequences of informal contracting," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 27(4), pages 726-741, October.
    19. Ján Zábojník, 2014. "Subjective evaluations with performance feedback," RAND Journal of Economics, RAND Corporation, vol. 45(2), pages 341-369, June.
    20. Wagner, Alexander F., 2011. "Relational contracts when the agent's productivity inside the relationship is correlated with outside opportunities," CEPR Discussion Papers 8378, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    illegal lending; enforcement; relational contract;
    All these keywords.

    JEL classification:

    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp13360. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Holger Hinte (email available below). General contact details of provider: https://edirc.repec.org/data/izaaade.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.