Is cheap talk just empty words? The signalling value of voluntary promises for loan repayment

Abstract

ABSTRACT When a loan applicant voluntarily makes a repayment promise, is it a valuable signal of his/her future repayment behaviour? Cheap talk models have demonstrated the informativeness of promises. We use a unique dataset from a direct lender in China to show that such cheap talk is informative: among new borrowers, those making voluntary promises are more likely to repay than those making no promises, whereas among returning borrowers, those making voluntary promises have a higher likelihood of default than those making no promises.