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Charitable giving or signalling? Voluntary contributions by microcredit borrowers in Pakistan

Mahreen Mahmud and Zaki Wahhaj

Journal of Economic Behavior & Organization, 2019, vol. 158, issue C, 394-415

Abstract: This paper investigates charitable giving by atypical donors in an unusual setting: the donors are microfinance recipients who provide charitable contributions to their lender, a non-profit institution. The institution provides interest-free loans but encourages its borrowers to make a voluntary contribution of any amount with the monthly instalment for principal repayment. Analysis of these monthly voluntary contributions suggests that the institution rewards borrowers for their contributions by giving them repeat loans. In particular, borrowers on joint liability loans in poorly performing groups make larger contributions using individual contributions to override a group-level signal. We develop a theory to show that this giving behaviour is consistent with borrowers signalling their level of success with the loan, but inconsistent with other explanations, including purely altruistic motives for giving. We argue that this mechanism of signalling success can provide the basis for a potential innovation in providing financial services in the presence of informational asymmetries.

Keywords: Microfinance; Charitable Giving; Signalling; Altruism; Non-Profit Organisations (search for similar items in EconPapers)
JEL-codes: O12 O16 D64 (search for similar items in EconPapers)
Date: 2019
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