Thomas Noe, University of Oxford, Lending without creditor rights, collateral, or debtor reputation – The "trusted-assistant'' loan in nineteenth century China

This paper empirically documents and provides a theoretical rationale for a private contracting mechanism that supported efficient and effective debt contract enforcement in a setting in which legal enforcement was impossible, borrowers lacked both collateral and reputational repayment incentives, and borrower cash flows were unobservable---the ``trusted-assistant loan,'' a lending mechanism used in nineteenth century Qing China to finance the acquisition of provincial administrative posts by exam takers who had passed  Imperial examinations. The theoretical analysis provides conditions under which the trusted-assistant loan is a renegotiation-proof implementation of efficient state dependent financing. The empirical analysis shows that the trusted-assistant loan was employed under the conditions suggested by the theoretical analysis and that loan performance conformed roughly with the theoretical prediction of efficient contracting.