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

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.

Citation

Kropp, J.D., Turvey, C.G., Just, D.R., Kong, R. and Guo, P. (2009), "Are the poor really more trustworthy? A micro‐lending experiment", Agricultural Finance Review, Vol. 69 No. 1, pp. 67-87. https://doi.org/10.1108/00021460910960471