Trust in Lending

Trust in Lending

We develop a theory of trust in lending that distinguishes between reputation and trust. Banks emerge as more trusted lenders than non-banks. We show that trust severs the link between performance and the cost and availability of financing for lenders, but trust can be lost and is difficult to regai...

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Veröffentlicht in:The review of economics and statistics 2024-09, p.1-45
Hauptverfasser: Thakor, Richard T., Merton, Robert C.
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creator Thakor, Richard T.
Merton, Robert C.
description We develop a theory of trust in lending that distinguishes between reputation and trust. Banks emerge as more trusted lenders than non-banks. We show that trust severs the link between performance and the cost and availability of financing for lenders, but trust can be lost and is difficult to regain. Banks survive an erosion of trust better than non-banks. Banks' trust advantage arises from the lower cost of funding due to insured deposits and an endogenous belief revision channel that complements the effect of the funding cost advantage. The results have novel policy relevance for deposit insurance scope.
doi_str_mv 10.1162/rest_a_01508
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