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Open Access Publications from the University of California

Digital Collateral

  • Author(s): Gertler, Paul
  • Green, Brett
  • Wolfram, Catherine
  • et al.

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A new form of secured lending utlitizing "digital collateral" has recently emerged,most prominently in low and middle income countries. Digital collateral relies on "lockout" technology, which allows the lender to temporarily disable the ow valueof the collateral to the borrower without physically repossessing it. We explore thisnew form of credit both in a model and in a field experiment using school-fee loansdigitally secured with a solar home system. We find that securing a loan with digitalcollateral drastically reduces default rates (by 19 pp) and increases the lender's rateof return (by 38 pp). Employing a variant of the Karlan and Zinman (2009) methodology, we decompose the total effect and find that roughly one-third is attributable to (ex-ante) adverse selection and two-thirds is attributable to (interim or ex-post) moral hazard. Access to a school-fee loan significantly increases school enrollment and school-related expenditures without detrimental effects to households' balance sheet.

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