Psychological and social motivations in microfinance contracts : theory and evidence
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We study, theoretically and empirically, the effort choices of microfinance borrowers under individual liability (IL) and joint liability (JL) contracts when loan repayments are made either privately or publicly. Our theoretical model identifies guilt aversion in a JL contract and shame aversion under public repayment of loans as the main psychological drivers of effort choice. Evidence from our lab-in-the-field experiment in Pakistan reveals large treatment effects and confirms the central roles of guilt and shame. Under private repayment, a JL contract increases effort by almost 100% relative to an IL contract. Under public repayment, effort levels are comparable under IL and JL contracts, indicating that shame aversion plays a more important role than guilt aversion. Under IL, public repayment relative to private repayment increases effort by 60%, confirming our shame-aversion hypothesis. Under JL, the private versus public repayment contrast shows that shame trumps guilt in explaining borrowers’ effort choices.
Dhami , S , Arshad , J & al-Nowaihi , A 2022 , ' Psychological and social motivations in microfinance contracts : theory and evidence ' , Journal of Development Economics , vol. 158 , 102912 . https://doi.org/10.1016/j.jdeveco.2022.102912
Journal of Development Economics
Copyright © 2022 The Author(s). Published by Elsevier B.V. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).
DescriptionWe gratefully acknowledge the research grant by Knowledge to Action (Registered Charity No. 1167408), UK, for the fieldwork in this research.
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