Creditworthiness: The Role of Trust in the Socioeconomic Network

Abstract

The paper explores the significance of a borrower’s socioeconomic network in assessing creditworthiness using a novel theoretical framework. We introduce a method for a lender to consolidate the individuals’ trustworthiness of the borrower within her socioeconomic network. From the borrower’s perspective, we consider the adverse social consequences of default within their socioeconomic network, which acts as a disincentive for the borrower to default on the credit obligation. This social pressure discourages credit default. Building on this connection between trust in a socioeconomic network, our paper develops a model that incorporates aggregate trust, project riskiness, and the social cost of default to evaluate credit risk. In this framework, a borrower with a secure project and a high social cost of default is more likely to honour their credit commitments. Conversely, for a similar project, a borrower with a low social cost of default may be more inclined to wilfully default on their credit obligations.