Psychological and social motivations in microfinance contracts: Theory and evidence

Sanjit Dhami, Junaid Arshad and Ali al-Nowaihi

Journal of Development Economics, 2022, vol. 158, issue C

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 (search for similar items in EconPapers)
JEL-codes: C91 C92 D82 D91 G21 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Psychological and Social Motivations in Microfinance Contracts: Theory and Evidence (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:158:y:2022:i:c:s0304387822000712

DOI: 10.1016/j.jdeveco.2022.102912

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