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Cosigners as Collateral

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Abstract
We investigate the role of cosigners as collateral using data from a South Indian financial institution. Using an exogenous change in the cosigner requirement, we establish a negative causal effect of cosigners on defaults: an increase in the number of cosigners reduces defaults all these equal. Our results suggest that a one-sixth increase in the number of cosigners reduces the incidence of a default by 7.5 percent. While most theories of collateral predict that increased cosigners will reduce defaults, we are first to find empirical evidence of this effect.

Suggested Citation

  • Stefan Klonner & Ashok Rai, 2008. "Cosigners as Collateral," Department of Economics Working Papers 2008-04, Department of Economics, Williams College.
    • Handle: RePEc:wil:wileco:2008-04
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    1. Andrei Shleifer & Florencio Lopez-de-Silanes & Rafael La Porta, 2008. "The Economic Consequences of Legal Origins," Journal of Economic Literature, American Economic Association, vol. 46(2), pages 285-332, June.
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    4. Kose John & Anthony W. Lynch & Manju Puri, 2003. "Credit Ratings, Collateral, and Loan Characteristics: Implications for Yield," The Journal of Business, University of Chicago Press, vol. 76(3), pages 371-410, July.
    5. Jimenez, Gabriel & Salas, Vicente & Saurina, Jesus, 2006. "Determinants of collateral," Journal of Financial Economics, Elsevier, vol. 81(2), pages 255-281, August.
    6. Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-744, Winter.
    7. repec:bla:jfinan:v:53:y:1998:i:3:p:845-878 is not listed on IDEAS
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    Cited by:

    1. Gharad Bryan & Dean Karlan & Jonathan Zinman, 2015. "Referrals: Peer Screening and Enforcement in a Consumer Credit Field Experiment," American Economic Journal: Microeconomics, American Economic Association, vol. 7(3), pages 174-204, August.
    2. Bryan, Gharad & Karlan, Dean S. & Zinman, Jonathan, 2012. "You Can Pick Your Friends, But You Need to Watch Them: Loan Screening and Enforcement in a Referrals Field Experiment," Center Discussion Papers 121674, Yale University, Economic Growth Center.
    3. Menkhoff, Lukas & Neuberger, Doris & Rungruxsirivorn, Ornsiri, 2012. "Collateral and its substitutes in emerging markets’ lending," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 817-834.

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    More about this item

    Keywords

    credit; default; cosigner; rosca;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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