SPI Working Paper Series

WP #: 133

Date: Mar 2015


Altruism, Identity and Financial Return: An Experiment on Microfinance Lending

    Josie I. Chen, Louis Putterman

    Brown University
    Brown University

We design a laboratory experiment to study willingness to lend and preference over borrowers in one-to-one on-line micro-finance lending. We find that both financial return and intrinsic (philanthropic) motivation affect the amount lent, with no evidence that the former crowds out the latter. Ethnic and other forms of identity have long been found to play a part in charitable and trust game contributions, but past studies have not ruled out impacts of face-to-face social pressures and differential assessments of riskiness. Our design eliminates social pressure and lets us control for two factors we elicit from the lenders/subjects: assessments of the likelihood of repayment by borrowers, as well as perception of their deservingness. We find that lenders are willing to trade greater risk in order to help more needy borrowers, but at a rate sensitive to the financial return condition. We find that lenders still show a statistically significant preference for borrowers with whom they share gender and ethnic similarity even after controlling for perceived riskiness, neediness, and other factors including physical attractiveness and weight.

SPI Quick Look:
This paper explores two questions in one-to-one online microfinance lending: what motivate lenders to make a loan? Who do lenders make a loan to? We designed a lab experiment to answer these questions. We find that lenders make more loans when given added financial returns or when given information that borrowers are from poor developing countries and an explanation about what microfinance is. Furthermore, lenders who know that borrowers are from poor developing countries lend more when given added financial returns. We also find that lenders prefer borrowers with whom they share similar characteristics such as gender and ethnicity.