Borrowing in an illegal market: contracting with loan sharks
Files
Accepted manuscript
Date
2022
Authors
Lang, Kevin
Leong, Kaiwen
Li, Huailu
Xu, Haibo
Version
Accepted manuscript
OA Version
Citation
K. Lang, K. Leong, H. Li, H. Xu. 2022. "Borrowing in an Illegal Market: Contracting with Loan Sharks" The Review of Economics and Statistics, pp.1-31. https://doi.org/10.1162/rest_a_01246
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 primarily rely 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.