Hostname: page-component-cd9895bd7-7cvxr Total loading time: 0 Render date: 2024-12-27T05:48:28.616Z Has data issue: false hasContentIssue false
  • English
  • Français

The role of inequity aversion in microloan defaults

Published online by Cambridge University Press:  19 September 2019

MATTHEW R. JORDAN Open the ORCID record for MATTHEW R. JORDAN [Opens in a new window] ,
WILLIAM T. DICKENS ,
OLIVER P. HAUSER Open the ORCID record for OLIVER P. HAUSER [Opens in a new window]  and
DAVID G. RAND
MATTHEW R. JORDAN*
Affiliation:
Yale University, Department of Psychology, New Haven, CT, USA
WILLIAM T. DICKENS
Affiliation:
Northeastern University, Department of Economics, Boston, MA, USA
OLIVER P. HAUSER
Affiliation:
University of Exeter Business School, Department of Economics, Exeter, UK
DAVID G. RAND
Affiliation:
Yale University, Department of Psychology, New Haven, CT, USA Yale University, Department of Economics, New Haven, CT, USA Yale University, School of Management, New Haven, CT, USA
*
*Correspondence to: Yale University, Department of Psychology, 2 Hillhouse Avenue, New Haven, CT 06511, USA. Email: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

Microcredit – joint-liability loans to the poorest of the poor – has been touted as a powerful approach for combatting global poverty, but sustainability varies dramatically across banks. Efforts to improve the sustainability of microcredit have assumed defaults are caused by free-riding. Here, we point out that the response of other group members to delinquent groupmates also plays an important role in defaults. Even in the absence of any free-rider problem, some people will be unable to make their payments due to bad luck. It is other group members’ unwillingness to pitch in extra – due to, among other things, not wanting to have less than other group members – that leads to default. To support this argument, we utilize the Ultimatum Game (UG), a standard paradigm from behavioral economics for measuring one's aversion to inequitable outcomes. First, we show that country-level variation in microloan default rates is strongly correlated (overall r = 0.81) with country-level UG rejection rates, but not free-riding measures. We then introduce a laboratory model ‘Microloan Game’ and present evidence that defaults arise from inequity-averse individuals refusing to make up the difference when others fail to pay their fair share. This perspective suggests a suite of new approaches for combatting defaults that leverage findings on reducing UG rejections.

Type
Article
Information
Behavioural Public Policy , Volume 6 , Issue 2 , April 2022 , pp. 303 - 324
Copyright
Copyright © Cambridge University Press 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Agrast, M. D., (2013), The World Justice Project rule of law index, 2012–2013.Google Scholar
Andersen, S. et al. , (2011), ‘Stakes matter in ultimatum games’, The American Economic Review, 101(7): 3427–3439.CrossRefGoogle Scholar
Anon, World Audit. Available at: http://www.worldaudit.org/ [Accessed April 1, 2016].Google Scholar
Armendáriz de Aghion, B., (1999), ‘On the design of a credit agreement with peer monitoring’, Journal of Development Economics, 60(1): 79–104. Available at: http://www.sciencedirect.com/science/article/pii/S0304387899000371.CrossRefGoogle Scholar
Armendáriz de Aghion, B. and Morduch, J., (2000), ‘Microfinance Beyond Group Lending’, Economics of Transition, 8(2): 401–420. Available at: http://dx.doi.org/10.1111/1468-0351.00049.CrossRefGoogle Scholar
Armendáriz de Aghion, B. and Morduch, J., (2005), The Economics of Microfinance MIT Press. Cambridge, Massachusetts.Google Scholar
Association, W.V.S., (2009), World Values Survey 1981–2008 official aggregate v. 20090901. Madrid: ASEP/ JDS.Google Scholar
Attanasio, O. et al. , (2015), ‘The impacts of microfinance: Evidence from joint-liability lending in Mongolia’, American Economic Journal: Applied Economics, 7(1): 90–122.Google Scholar
Awaworyi Churchill, S. and Nuhu, A. S., (2016), ‘What has failed: microfinance or evaluation methods? Journal of Sustainable Finance & Investment, 6(2): 85–94. Available at: https://doi.org/10.1080/20430795.2016.1176424.CrossRefGoogle Scholar
Banerjee, A., et al. , (2015a), ‘The miracle of microfinance? Evidence from a randomized evaluation’, American Economic Journal: Applied Economics, 7(1): 22–53.Google Scholar
Banerjee, A., Karlan, D. and Zinman, J., (2015b), ‘Six randomized evaluations of microcredit: introduction and further steps’, American Economic Journal: Applied Economics, 7(1): 1–21.Google Scholar
Banerjee, A. V., Besley, T. and Guinnane, T. W., (1994), ‘The neighbor's keeper: the design of a credit cooperative with theory and a test’, The Quarterly Journal of Economics, 491–515.CrossRefGoogle Scholar
Barboza, G. A. and Barreto, H., (2006), ‘Learning by association: micro credit in Chiapas, Mexico’, Contemporary Economic Policy, 24(2): 316–331.CrossRefGoogle Scholar
Barometer, G., (2009), No Title. Round 1 Official data file.Google Scholar
Besley, T. and Coate, S., (1995), ‘Group lending, repayment incentives and social collateral’, Journal of Development Economics, 46(1): 1–18. Available at: http://www.sciencedirect.com/science/article/pii/030438789400045E.CrossRefGoogle Scholar
Bó, P. D., (2005), ‘Cooperation under the shadow of the future: experimental evidence from infinitely repeated games’, American Economic Review, 1591–1604.CrossRefGoogle Scholar
Bó, P. D. and Fréchette, G. R., (2011), ‘The evolution of cooperation in infinitely repeated games: Experimental evidence’, The American Economic Review, 101(1): 411–429.Google Scholar
Camerer, C. F., (2003), ‘Behavioural studies of strategic thinking in games’, Trends in cognitive sciences, 7(5): 225–231.CrossRefGoogle ScholarPubMed
Chemin, M., (2008), ‘The benefits and costs of microfinance: evidence from Bangladesh’, The journal of development studies, 44(4): 463–484.CrossRefGoogle Scholar
Croson, R. T. A. and Marks, M. B., (2000), ‘Step returns in threshold public goods: A meta-and experimental analysis’, Experimental Economics, 2(3): 239–259.CrossRefGoogle Scholar
Czura, K., (2015), ‘Pay, peek, punish? Repayment, information acquisition and punishment in a microcredit lab-in-the-field experiment’, Journal of Development Economics, 117: 119–133.CrossRefGoogle Scholar
D'espallier, B., Guérin, I. and Mersland, R., (2011), ‘Women and repayment in microfinance: A global analysis’, World development, 39(5): 758–772.CrossRefGoogle Scholar
Dercon, S., (2002), ‘Income risk, coping strategies, and safety nets’, The World Bank Research Observer, 17(2): 141–166.CrossRefGoogle Scholar
Duvendack, M. and Palmer-Jones, R., (2012), ‘High noon for microfinance impact evaluations: re-investigating the evidence from Bangladesh’, The Journal of Development Studies, 48(12): 1864–1880.CrossRefGoogle Scholar
Fehr, E. and Fischbacher, U., (2003), ‘The nature of human altruism’, Nature, 425(6960): 785–791.CrossRefGoogle ScholarPubMed
Fehr, E. and Schmidt, K. M., (1999), ‘A theory of fairness, competition, and cooperation’, Quarterly journal of Economics, 817–868.CrossRefGoogle Scholar
Field, E. and Pande, R., (2008), ‘Repayment frequency and default in microfinance: evidence from India’, Journal of the European Economic Association, 6(2–3): 501–509. Available at: http://dx.doi.org/10.1162/JEEA.2008.6.2-3.501.CrossRefGoogle Scholar
Ghatak, M. and Guinnane, T. W., (1999), ‘The economics of lending with joint liability: theory and practice1’, Journal of development economics, 60(1): 195–228.CrossRefGoogle Scholar
Griffin, D. and Husted, B. W., (2015), ‘Social sanctions or social relations? Microfinance in Mexico’, Journal of Business Research, 68(12): 2579–2587.CrossRefGoogle Scholar
Grimm, V. and Mengel, F., (2011), ‘Let me sleep on it: Delay reduces rejection rates in ultimatum games’, Economics Letters, 111(2): 113–115.CrossRefGoogle Scholar
Group, W.B., (2012), World Development Indicators 2012, World Bank Publications.Google Scholar
Hermes, N. and Lensink, R., (2011), ‘Microfinance: its impact, outreach, and sustainability’, World Development, 39(6): 875–881.CrossRefGoogle Scholar
Hermes, N. and Lensink, R., (2007), ‘The empirics of microfinance: what do we know? The Economic Journal, 117(517): F1–F10. Available at: http://dx.doi.org/10.1111/j.1468-0297.2007.02013.x.CrossRefGoogle Scholar
Herrmann, B., Thöni, C. and Gächter, S., (2008), ‘Antisocial Punishment Across Societies’, Science, 319(5868): 1362–1367. Available at: http://www.sciencemag.org/content/319/5868/1362.abstract.CrossRefGoogle ScholarPubMed
Hisako, K. A. I. and Shigeyuki, H., (2009), Microfinance and Inequality.Google Scholar
Horton, J. J., Rand, D. G. and Zeckhauser, R. J., (2011), ‘The online laboratory: Conducting experiments in a real labor market’, Experimental Economics, 14(3): 399–425.CrossRefGoogle Scholar
Johnson, N. and Mislin, A., (2008), Cultures of Kindness: A Meta-Analysis of Trust Game Experiments. Social Science Research Network Working Paper Series. Available at: http://ssrn.com/abstract=1315325.CrossRefGoogle Scholar
Karlan, D. and Zinman, J., (2009), ‘Expanding credit access: Using randomized supply decisions to estimate the impacts’, The Review of Financial Studies, 23(1): 433–464.CrossRefGoogle Scholar
Karlan, D. and Zinman, J., (2011), ‘Microcredit in theory and practice: Using randomized credit scoring for impact evaluation’, Science, 332(6035): 1278–1284.CrossRefGoogle ScholarPubMed
Khandker, S. R., (2005), ‘Microfinance and poverty: Evidence using panel data from Bangladesh’, The World Bank Economic Review, 19(2): 263–286.CrossRefGoogle Scholar
Market, M. I. X., (2008), Microfinance Information Exchange. Comparative Analysis. Retrieved October.Google Scholar
Morduch, J., (1994), Poverty and vulnerability. The American Economic Review, 221–225.Google Scholar
Morduch, J., (1999), ‘The Microfinance Promise’, Journal of Economic Literature, 37(4): 46.CrossRefGoogle Scholar
Morduch, J. and Haley, B., (2002), Analysis of the effects of microfinance on poverty reduction. New York: NYU Wagner Working Paper, 1014.Google Scholar
Neo, W. S. et al. , (2013), ‘The effects of time delay in reciprocity games’, Journal of Economic Psychology, 34: 20–35.CrossRefGoogle Scholar
Odell, K., (2010), Measuring the impact of microfinance. Grameen Foundation, Washington, pp.1–38.Google Scholar
Oechssler, J., Roider, A. and Schmitz, P., (2013), Cooling-off in the ultimatum game.Google Scholar
Oechssler, J., Roider, A. and Schmitz, P. W., (2015), ‘Cooling Off in Negotiations: Does it Work? Journal of Institutional and Theoretical Economics JITE, 171(4): 565–588.CrossRefGoogle Scholar
Oosterbeek, H., Sloof, R. and van de Kuilen, G., (2004), ‘Cultural Differences in Ultimatum Game Experiments: Evidence from a Meta-Analysis’, Experimental Economics, 7(2): 171–188. Available at: http://dx.doi.org/10.1023/B:EXEC.0000026978.14316.74.CrossRefGoogle Scholar
Paxton, J., Graham, D. and Thraen, C., (2000), ‘Modeling group loan repayment behavior: New insights from Burkina Faso’, Economic Development and cultural change, 48(3): 639–655.CrossRefGoogle Scholar
Peysakhovich, A., Nowak, M. A. and Rand, D. G., (2014), ‘Humans display a ‘cooperative phenotype'that is domain general and temporally stable’, Nature communications, 5.CrossRefGoogle ScholarPubMed
Pitt, M. M. and Khandker, S. R., (1998), ‘The impact of group-based credit programs on poor households in Bangladesh: Does the gender of participants matter? Journal of political economy, 106(5): 958–996.CrossRefGoogle Scholar
Stiglitz, J. E., (1990), ‘Peer Monitoring and Credit Markets’, The World Bank Economic Review, 4(3): 351–366. Available at: http://wber.oxfordjournals.org/content/4/3/351.abstract.CrossRefGoogle Scholar
Thaler, R. H., (1988), ‘Anomalies: The ultimatum game’, The Journal of Economic Perspectives, 2(4): 195–206.CrossRefGoogle Scholar
Wang, C. S. et al. , (2011), ‘Retribution and emotional regulation: The effects of time delay in angry economic interactions’, Organizational Behavior and Human Decision Processes, 116(1): 46–54.CrossRefGoogle Scholar
Wydick, B., (2001), ‘Group Lending under Dynamic Incentives as a Borrower Discipline Device’, Review of Development Economics, 5(3): 406–420. Available at: http://dx.doi.org/10.1111/1467-9361.00132.CrossRefGoogle Scholar
Yunus, M., (2007), Banker to the Poor, Penguin Books India.Google Scholar
Supplementary material: File

Jordan et al. supplementary material

Jordan et al. supplementary material

Download Jordan et al. supplementary material(File)
File 42.8 KB