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Are the poor really more trustworthy? A micro-lending experiment

Author

Listed:
  • Jaclyn D. Kropp
  • Calum G. Turvey
  • David R. Just
  • Rong Kong
  • Pei Guo

Abstract

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.

Suggested Citation

  • Jaclyn D. Kropp & Calum G. Turvey & David R. Just & Rong Kong & Pei Guo, 2009. "Are the poor really more trustworthy? A micro-lending experiment," Agricultural Finance Review, Emerald Group Publishing, vol. 69(1), pages 67-87, May.
  • Handle: RePEc:eme:afrpps:v:69:y:2009:i:1:p:67-87
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    References listed on IDEAS

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    Cited by:

    1. Turvey, Calum G. & He, Guangwen & MA, Jiujie & Kong, Rong & Meagher, Patrick, 2012. "Farm credit and credit demand elasticities in Shaanxi and Gansu," China Economic Review, Elsevier, vol. 23(4), pages 1020-1035.
    2. Edward L. Glaeser & David I. Laibson & José A. Scheinkman & Christine L. Soutter, 2000. "Measuring Trust," The Quarterly Journal of Economics, Oxford University Press, pages 811-846.
      • Glaeser, Edward Ludwig & Laibson, David I. & Scheinkman, Jose A. & Soutter, Christine L., 2000. "Measuring Trust," Scholarly Articles 4481497, Harvard University Department of Economics.
    3. Hering, Imke & Musshoff, Oliver, 2015. "Dynamic Incentives in Microfinance – What about the Farmers?," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 204673, Agricultural and Applied Economics Association;Western Agricultural Economics Association.
    4. Weber, Ron & Musshoff, Oliver, 2012. "Microfinance for agricultural firms - What can we learn from bank data?," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 126708, International Association of Agricultural Economists.

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