Are the poor really more trustworthy? A micro-lending experiment
Purpose - This paper aims to clarify the relationship between wealth and trustworthiness with the goal of understanding why micro-lending institutions grant loans to poor individuals countering well-known models of credit markets and credit rationing, such as those proposed by Stiglitz and Weiss. Micro-credit markets appear to be based on two conjectures: the poor are trustworthy, and their willingness to pay for credit is relatively high. Design/methodology/approach - The paper simulates trust-based lending in an experimental setting to determine whether the conjecture that the poor are trustworthy is plausible. By conducting the experiments in the USA, a wealthy developed country, and China, a developing country where formal micro-finance institutions have not established a visible presence, it is possible to test the conjecture and draw cross-cultural comparisons. Findings - The paper finds that while the absolute level of family income had no significant effect on repayment behavior, US borrowers that perceived themselves as having a family income that was relatively lower than other US households repaid at higher rates. Therefore, evidence was found that trustworthiness might be a function of perceived relative wealth or social status rather than the absolute level of wealth or income. Research limitations/implications - The research results may be difficult to generalize because of the experimental approach and use of students as participants. Practical implications - The paper includes implications for the administration of micro-credit loans in China and other developing nations. Originality/value - This paper experimentally tests a conjecture which appears to be the foundation of micro-credit markets.
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Volume (Year): 69 (2009)
Issue (Month): 1 (May)
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