The final speaker in this semester’s SWE colloquium series is Dr Jan Schmitz, ETH Zürich (Thursday 19 December).

Trustworthiness and new financial technologies

In most situations, economic agents have differing information about the quality of goods and services they exchange. In other words, there is asymmetric information and actors need to trust their trading partners to engage in exchange. In financial markets, trust plays a particularly important role. Consumer credit markets, for example, are plagued by uncertainty about the ability and willingness of borrowers to repay. Recent developments in financial technologies (Fintech) additionally change the classical bilateral borrower lender relationship and crowdlending platforms provide borrowers the possibility to borrow from many lenders at the same time. This paper examines how the number of people who trust (provide credit) affects trustworthiness (repayment). Data from peer to peer lending platforms indicate that there is a negative correlation between loan repayment and the number of investors involved. Laboratory and online experiments in which borrowers face the trade-of between repayment and strategically defaulting show that the number of lenders involved significantly increases default rates. Moral appeals highlighting the number of people who trust, however, significantly reduce default rates. The appeals impact the propensity to default more strongly if more people are affected by the borrowers’ repayment decisions.