Asymmetric information and bank lending: The role of formal and informal institutions (a survey of laboratory research)

Abstract

Purpose

To provide a selective review of most recent developments in experimental economics of banking and lending and to summarize and synthesize the experiment designs and results in banking under asymmetric information.

Methodology

The review includes recently published or working papers (2006–2013) that exclusively employ experimental economics methodology, especially for studying the impact of formal or informal institutions on lending in credit markets.

Findings

The results of the reviewed experimental studies provide support for the important role of both informal (e.g., relationship banking and reputation) and formal (e.g., third-party enforcement; collateral) institutions and their impact on credit market performance, as well as the importance of studying the interaction of the two types of institutions.

Research limitations/implications

The number of studies reviewed is fairly small but growing, indicating that this is the area of growing significance.

Practical implications

Controlled economic experiments are better able to address the questions regarding the direction of causality in empirical relationships. Economic experiments are particularly useful in studying complex markets like credit and capital and in eliciting specific effects of institutions on credit market performance. Such well-established empirical relationships will be able to provide guidance for policy making for financial market reform.

Originality/value

This is the first review of laboratory research in banking and lending under asymmetric information that aims to call attention to this area of research and serves as a starting point for an interested researcher and provide future direction.

Citation

Christie, A.N. (2013), "Asymmetric information and bank lending: The role of formal and informal institutions (a survey of laboratory research)", Experiments in Financial Economics (Research in Experimental Economics, Vol. 16), Emerald Group Publishing Limited, Leeds, pp. 5-30. https://doi.org/10.1108/S0193-2306(2013)0000016002