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Inter-temporal Calculative Trust Design to Reduce Collateral Need for Business Credits

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  • Muduli, Silu
  • Dash, Shridhar Kumar
Abstract
Credit rationing arising out of informational asymmetry and lack of collateral is a well-recognised economic constraint in the credit market. These constraints get magnified for small businesses. This paper attempts to capture the dimension of trustworthiness (calculative trust) by designing a multi-period, incentivised payment structure that will induce economic agents to reveal the existence of private information about any projects or true intentions of paying up the credit that is going to fund the project. The model dynamically estimates the collateral needed by taking into account the truthfulness of the borrower. The proposed design is compared with the benchmark model - credit scoring-based model. Randomised simulations are carried out for the ex ante solution for the borrower. We find that the proposed design outperforms from the perspective of lenders when the probability of default of any project is less than 80 per cent. Our simulation result also finds that building trust helps small business owner to significantly reduce the need for collateral.

Suggested Citation

  • Muduli, Silu & Dash, Shridhar Kumar, 2017. "Inter-temporal Calculative Trust Design to Reduce Collateral Need for Business Credits," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 38(1 and 2), pages 65-83.
    • Handle: RePEc:zbw:espost:182524
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    References listed on IDEAS

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    Keywords

    Calculative trust; collateral;

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