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 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.

• Publication year

  2018

• Venue

  Review of Economics and Statistics

• Publication date

  2018-06-01

• Fields of study

  Business, Economics

• Identifiers
  DOI 10.2139/SSRN.3201689
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

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