Third-Party Guarantees – The Role of Financial Knowledge and Social Norms

Tasks

Third-party guarantees are a form of securing loans, where the guarantor is liable for the outstanding debt including interest in case the borrower defaults. By granting a guarantee one can help family and friends to gain access to credit. Social norms, such as a perceived moral obligation to support family members and friends, can influence one’s decision to grant a guarantee. As there is no initial financial transaction when guarantees are granted, individuals are often not aware of the legal consequences and financial risks involved.

We will use household survey data from ten Central, Eastern and South-Eastern European countries to investigate how well individuals understand the potential consequences of granting a guarantee and how this relates to socio-economic factors and to economic and banking environments. We will analyse whether better understanding of third-party guarantees has an effect on the behaviour of giving and taking third-party guarantees. We will describe how decisions to act as guarantor and to take a loan with a guarantee relate to each other and to other forms of financial support such as informally lending money. Taken together, this will provide a full picture of how “give-and-take” networks interact with and counteract financial knowledge. To isolate the impact of information and knowledge on one’s willingness to grant a guarantee, we will conduct a randomized controlled trial.

By gaining a deeper understanding into (i) the motivation and reasons for granting third-party guarantees and (ii) how a lack of knowledge about the consequences of granting guarantees plays a role in increasing households’ vulnerabilities, we want to foster the academic and practitioners debate on this thus-far neglected aspect of financial decision-making. Our vision is that our results will form the basis for an information campaign on the risks involved in granting a third-party guarantee.

Methods

The research project covers different econometric methods, including instrumental-variables methods and randomized controlled experiments.

Data and other sources

OeNB Euro Survey (various survey waves).
Own survey and data collection.