Signaling Credit-Worthiness: Land Titles, Banking Practices and Access to Formal Credit in Indonesia

It is often suggested that the poor are credit-rationed due to their lack of formal collateral. Using a household survey from Indonesia, we estimate the impact of having a land title on formal credit access. Adopting an instrumental variable approach, we find that having a formal title significantly increases a household's probability of ever having had a formal loan and the observed loan amount. Why land titles increase access to credit is still not clear. Incorporating data from a unique survey of bankers in Indonesia, we will argue that possessing a formal title increases a household's incidences of formal credit not because the value of the title as collateral but because of what possessing a title signals about the household to the banker. We apply a simple model of contract choice to show how title can act as an indirect signal.

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Selected Paper 133125

 Record created 2017-04-01, last modified 2020-10-28

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