Purpose: The purpose of this work is to experimentally measure trust and study its relationship to group loan allocation within a community bank. Design/methodology/approach: An artefactual field experiment is run to capture a measure of trust that mimics aspects of trusting behavior in a community bank. The experimental design and empirical setting take into account risk and altruism, two known confounders of trust measures. Regression analysis is used to estimate the relationship between a novel measure of trust and the loan amount a borrower receives from their rural community bank. Findings: The trust measure has a statistically significant, positive relationship with loan size. A one standard deviation increase in the trust measure corresponds to a 13.3 percent increase in the loan amount. Social implications: Results of the study suggest that, for community banks, trust in a borrower plays a large role in screening applicants and therefore determining loan size. Several such banks have considered graduating to commercial credit. However, given the outsize role of trust in lending decisions, it is not clear if commercial lending models – which rely less on social capital – will work. Originality/value: A new trust game is developed that captures relationship-specific measures of directed trust that community bank members have towards each borrower. The trust measure is also context-specific as play in the game is analogous to how community bank members trust some borrowers (more than others) with larger loans. The emphasis on relationship- and context-specific trust measures is key to interpreting results from artefactual field experiments.
|Number of pages||19|
|Journal||Agricultural Finance Review|
|State||Published - Jan 21 2021|
Bibliographical notePublisher Copyright:
© 2020, Emerald Publishing Limited.
- Artefactual field experiment
- Group lending
- Social capital
ASJC Scopus subject areas
- Agricultural and Biological Sciences (miscellaneous)
- Economics, Econometrics and Finance (miscellaneous)