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Psychological and Social Motivations in Microfinance Contracts: Theory and Evidence

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posted on 2022-07-05, 08:56 authored by Sanjit Dhami, Junaid Arshad, Ali al-Nowaihi

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.

History

Citation

Journal of Development Economics, 2022, https://doi.org/10.1016/j.jdeveco.2022.102912

Author affiliation

Division of Economics, School of Business, University of Leicester

Version

  • P (Proof)

Published in

Journal of Development Economics

Publisher

Elsevier

issn

0304-3878

Acceptance date

2022-05-30

Copyright date

2022

Available date

2022-07-05

Language

en

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