Third-party guarantees - the role of financial knowledge and social norms

Meet the researchers: Christa Hainz, Elisabeth Beckmann & Sarah Reiter
Posted on April 22, 2020

Meet the winners of the TFI long-term research grant: Christa Hainz and Sarah Reiter from the ifo Institute – Leibniz Institute for Economic Research at the University of Munich, and Elisabeth Beckmann from the Austrian Central Bank.

They will study how financial knowledge and social norms influence the decision of granting third-party guarantees to family and friends to gain access to credit. Who are the researchers and what is the main motto of this project and its expected impact?

Third-party guarantees are one 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.

“Granting a third-party guarantee for someone else is a decision that does not have an immediate effect but can have dramatic financial consequences later on.”

What motivated you to work together with the Think Forward Initiative?

With our research, we strive to better understand households’ financial decision-making in the context of social networks, and the role of knowledge in the giving and taking of loan guarantees. To this end, the TFI grant enables us to conduct a randomized controlled trial and collect unique new data. These data allow us to study the role of information in explaining an individual’s willingness to act as guarantor for another person’s loan. We expect our research to form the basis for an information campaign—collaboration with the TFI provides a unique opportunity to convert research on households’ financial decision-making into possible policy action. Becoming part of the TFI network provides us with an excellent platform to disseminate our research results and make them available to a wide audience via the TFI’s website, blog stories, and reports.

How do you expect your research results to contribute to people’s financial well-being?

Third-party guarantees have beneficial economic effects and are a manifestation of close social ties. However, they also impose non-negligible risk on the guarantor: Granting a third-party guarantee for someone else is a decision that does not have an immediate effect but can have dramatic financial consequences later on. Third-party guarantors can lose a significant share of their wealth if the guarantee is called upon and, as a result, face economic and social decline. Our research shows that almost every second individual lacks knowledge about the legal and financial implications of third-party guarantees. Through the randomized controlled trial in our research project, we find out how an individual’s willingness to grant a guarantee is influenced by information about the legal consequences of granting a third-party guarantee and the risk of the borrower defaulting. Our research should provide valuable insights into how a general information campaign could be designed to help potential guarantors take well-informed decisions.

The research team

Christa Hainz is a Senior Economist and Deputy Director of the ifo Center for International Institutional Comparisons and Migration Research. Her research focuses on financial intermediation, household finance, and institutions. Christa’s work is published in the Economic Journal, the Journal of Financial Intermediation, and the Journal of Banking and Finance. On SSRN she belongs to the top 10 per cent authors by both new and all-time downloads. She received the Lamfalussy fellowship. Christa studied at the University of Munich and holds a doctoral degree of the University of Munich.

Elisabeth Beckmann is a Principal Economist in the Foreign Research Division of the Austrian Central Bank (Oesterreichische Nationalbank, OeNB), where her main responsibility is the design, data quality management and advancement of the OeNB Euro Survey. Her work is published in peer-reviewed journals, such as the Journal of Economic Behavior & Organization. Elisabeth studied at the University College London, the University of Munich, and the University of Glasgow. She holds a PhD in Economics from the Vienna University of Economics and Business. Disclaimer: All views expressed are those of the authors and do not necessarily represent the views of Oesterreichische Nationalbank or the Eurosystem.

Sarah Reiter is a PhD candidate of Economics at the ifo Institute. She got a master’s degree in Economics from the University of Vienna and another master’s degree in Business Education from the Vienna University of Economics and Business. Her main research interests are financial literacy and household’s financial decision-making. Methodologically, she focuses on applied econometrics. Before starting her PhD, she worked in the Banking-Supervision Division of the Austrian Central Bank.