Psychological and social motivations in microfinance contracts: Theory and evidence

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