Psychological and Social Motivations in Microfinance Contracts: Theory and Evidence *

Dhami, Sanjit; Arshad, Junaid; Al-Nowaihi, Ali

Abstract

We study, theoretically and empirically, the effort choices of microfinance borrowers under individual liability (IL) and joint liability (JL) contracts when loan repayments are made either privately or publicly. Our theoretical model identifies guilt aversion in a JL contract and shame aversion under public repayment of loans as the main psychological drivers of effort choice. Evidence from our lab-in-the-field experiment in Pakistan reveals large treatment effects and confirms the central roles of guilt and shame. Under private repayment, a JL contract increases effort by almost 100% relative to an IL contract. Under public repayment, effort levels are comparable under IL and JL contracts, indicating that shame aversion plays a more important role than guilt aversion. Under IL, public repayment relative to private repayment increases effort by 60%, confirming our shame-aversion hypothesis. Under JL, the private versus public repayment contrast shows that shame trumps guilt in explaining borrowers' effort choices.

Citation

Dhami, S., Arshad, J., & Al-Nowaihi, A. (2022). Psychological and Social Motivations in Microfinance Contracts: Theory and Evidence *. Journal of Development Economics, 158, Article 102912. https://doi.org/10.1016/j.jdeveco.2022.102912

• Journal Article Type: Article
• Acceptance Date: May 30, 2022
• Online Publication Date: Jun 14, 2022
• Publication Date: Sep 1, 2022
• Deposit Date: Sep 18, 2023
• Publicly Available Date: Sep 20, 2023
• Journal: Journal of Development Economics
• Print ISSN: 0304-3878
• Electronic ISSN: 1872-6089
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 158
• Article Number: 102912
• DOI: https://doi.org/10.1016/j.jdeveco.2022.102912
• Keywords: Joint/individual liability; public/private repayment; belief-dependent moti- vations; guilt; shame; lab-in-the-field experiment JEL Classification: C91, C92, D82, D91, G21
• Public URL: https://nottingham-repository.worktribe.com/output/25362028
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S0304387822000712?via%3Dihub