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Psychological and social motivations in microfinance contracts: Theory and evidence

Sanjit Dhami Orcid Logo, Junaid Arshad Orcid Logo, Ali al-Nowaihi

Journal of Development Economics, Volume: 158, Start page: 102912

Swansea University Author: Junaid Arshad Orcid Logo

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DOI (Published version): 10.1016/j.jdeveco.2022.102912

Abstract

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 und...

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Published in: Journal of Development Economics
ISSN: 0304-3878
Published: Elsevier BV 2022
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URI: https://cronfa.swan.ac.uk/Record/cronfa62256
Abstract: 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.
Keywords: Joint/individual liability; Public/private repayment; Belief-dependent motivations; Guilt; Shame; Lab-in-the-field experiment
College: Faculty of Humanities and Social Sciences
Start Page: 102912

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