Pseudo-formal loan arrangements can reduce the awkwardness of borrowing money from family. iStockPhoto // Koldunov

Financial Theatrics

Why do families sometimes create detailed loan agreements when providing financial help to relatives, even though these documents are not legally binding and typically come with an implicit understanding of flexibility? Adam Hayes’s research in Social Forces uncovers the hidden social function of these “pseudo-formal” arrangements: they enable familial support while maintaining the dignity of the receiver—thus alleviating discomfort for both parties.

Through a series of vignette experiments, Hayes examined how people evaluated different forms of financial assistance among family members. Experiment participants read scenarios depicting exchanges between parents and children or between siblings, using different financial assistance structures: pseudo-formal arrangements with written terms but mutually understood flexibility; legal contracts; informal agreements; and outright gifts. He learned that participants consistently preferred the pseudo-formal arrangements, which were perceived as respectful to the recipient’s autonomy and as a way for them to save face.

While his experiments focused specifically on financial loans, Hayes also discusses other cases of pseudo-formality, such as formalized rent agreements for adult children living with parents or “token employment” offered to unemployed relatives. The fact that the participants know they are performing does not diminish the performance’s power; pseudo-formality provides a script that allows both parties to separate their personal from their financial relationships.