Paper by Jefferson Duarte, Stephan Siegel and Lance Young
Abstract:
This study considers the impact of trustworthiness on financial markets at the individual transaction level. We employ a natural experiment using the peer-to-peer lending site, Prosper.com. We find that borrowers who are perceived as untrustworthy are economically and significantly less likely to have their loan requests filled, even controlling for physical attractiveness, detailed demographic information, credit profile, income, education, employment and loan-specific information. Indeed, in order to have the same probability of being funded as a borrower perceived as trustworthy, a borrower who is perceived as untrustworthy must pay a promised interest rate that is 182 basis points higher. These results suggest that agent’s perceptions of trustworthiness are important, even in relatively information-rich environments.
Related:
New research shows that your looks, creditworthiness may go hand in hand
If one considers the premium over inflation to be default risk probability the probability can be converted to a mean time to default. The higher risk premium reflects a shorter time horizon to anticipated defualt. Note this is disregarding the term structure of the instrument. The shorter time frame is a trust proxy. I trust you to pay me back in 6 months, but don’t really know so much about you in 10 years. It would be interested to see the correlates between “trust” premium and historical political and central bank activity. The implied MTBF would also indicate how quickly the market forgets past indescretions or anticipates future ones.