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Enhancing capabilities through credit access: Creditworthiness as a signal of trustworthiness under asymmetric information

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  • Becchetti, Leonardo
  • Conzo, Pierluigi

Abstract

Creditworthiness and trustworthiness are almost synonyms because, under asymmetric information, the act of conferring a loan has the indirect effect of signaling the trustworthiness of the borrower. We test the creditworthiness/trustworthiness nexus in an investment game experiment on a sample of participants/non-participants in a microfinance program in Argentina and find that trustors give significantly more to (and believe they will receive more from) microfinance borrowers. The first- and second-order beliefs of trustees are also consistent with this picture. Our findings then show that MF participants appear more trustworthy and this may help microfinance to work. A related consequence is that, if (and only if) borrower's trustworthiness is not public information, the mere loan provision acts as a reputation enhancing signal increasing the borrower's attractiveness as a business partner. In such case we have a channel through which a private financial intermediary contributes to the provision of a public good like information, thereby reducing the adverse consequences of market failures on the creation of economic value.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 95 (2011)
Issue (Month): 3 ()
Pages: 265-278

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Handle: RePEc:eee:pubeco:v:95:y:2011:i:3:p:265-278

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Web page: http://www.elsevier.com/locate/inca/505578

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Keywords: Field experiment; Microfinance; Investment game; Trust; Trustworthiness;

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Cited by:
  1. Leonardo Becchetti, 2011. "Voting with the Wallet," Econometica Working Papers wp33, Econometica.
  2. Conzo, Pierluigi, 2014. "Trust and Cheating in Sri Lanka: The Role of Experimentally-Induced Emotions about Tsunami," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201403, University of Turin.

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