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Strategic Information Suppression in Borrowing and Pre-Lending Cognition: Theory and Evidence

Author

Listed:
  • Zhongwen Chen

    (Department of Economics, Monash Business School, Monash University, Melbourne, VIC 3800, Australia)

  • Xiaojian Zhao

    (Department of Economics, Monash Business School, Monash University, Melbourne, VIC 3800, Australia)

Abstract
This paper theoretically studies the interaction between an informed borrower and an uninformed lender facing possible default of a loan application. The lender is motivated to invest cognitive resources before making a lending decision. If the regulatory fine is weak, it is impossible for a bad-debt borrower to fully disclose his situation in the application. In this case, when the likelihood of a bad debt is low, the borrower always claims that nothing in the application is wrong. Otherwise, the borrower randomizes between full disclosure and information suppression. The transaction cost of the lender’s pre-lending cognition increases with the default probability, as the default probability is small and decreases thereafter. Evidence from a peer-to-peer lending platform with 816,274 observations between 2012 and 2015 in the United States is largely consistent with our model implications.

Suggested Citation

  • Zhongwen Chen & Xiaojian Zhao, 2023. "Strategic Information Suppression in Borrowing and Pre-Lending Cognition: Theory and Evidence," Games, MDPI, vol. 14(3), pages 1-24, May.
    • Handle: RePEc:gam:jgames:v:14:y:2023:i:3:p:43-:d:1154888
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    References listed on IDEAS

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    Cited by:

    1. Gui, Zhengqing & Huang, Yangguang & Zhao, Xiaojian, 2024. "Financial fraud and investor awareness," Journal of Economic Behavior & Organization, Elsevier, vol. 219(C), pages 104-123.

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