We estimate a structural model of borrowing and lending in the illegal money lending market using a unique panel survey of 1,090 borrowers taking out 11,032 loans from loan sharks. We use the model to evaluate the effects of interventions aimed at limiting this market. We find that an enforcement crackdown that occurred during our sample period increased lenders’ unit cost of harassment and interest rates, while lowering volume of loans, lender profits and borrower welfare. Policies removing borrowers in the middle of the repayment ability distribution, reducing gambling or reducing time discounting are also effective at lowering lender profitability.

Using over 11,000 unlicensed loans to over 1,000 borrowers in Singapore, we provide basic information about an understudied market: illegal moneylending. Borrowers and lenders interact frequently and rely primarily on relational contracts to enforce their agreements. Borrowers have high discount rates, often have gambling and/or substance abuse problems, and often repay late. While lenders sometimes resort to nonfinancial punishments, the primary cost of late repayment is the compounding of a very high interest rate. Consistent with our view that lenders cannot extract all surplus, a crackdown on illegal lending raised interest rates and lowered the size of loans.