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

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  • Mahmud, Mahreen
  • Wahhaj, Zaki

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.

Suggested Citation

  • Mahmud, Mahreen & Wahhaj, Zaki, 2019. "Charitable giving or signalling? Voluntary contributions by microcredit borrowers in Pakistan," Journal of Economic Behavior & Organization, Elsevier, vol. 158(C), pages 394-415.
  • Handle: RePEc:eee:jeborg:v:158:y:2019:i:c:p:394-415
    DOI: 10.1016/j.jebo.2018.12.011
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    References listed on IDEAS

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    More about this item

    Keywords

    Microfinance; Charitable Giving; Signalling; Altruism; Non-Profit Organisations;

    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers

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