Enhancing capabilities through credit access: Creditworthiness as a signal of trustworthiness under asymmetric information

a r t i c l e i n f o JEL classification: O16 C93 D03 Keywords: Field experiment Microfinance Investment game Trust Trustworthiness Creditworthiness and trustworthiness are almost synonyms because, under asymmetric information, the act of conferring a loan has the indirect effect of signaling the trustworthiness of the borrower. We test the creditworthiness/trustworthiness nexus in an investment game experiment on a sample of participants/non-participants in a microfinance program in Argentina and find that trustors give significantly more to (and believe they will receive more from) microfinance borrowers. The first-and second-order beliefs of trustees are also consistent with this picture. Our findings then show that MF participants appear more trustworthy and this may help microfinance to work. A related consequence is that, if (and only if) borrower's trustworthiness is not public information, the mere loan provision acts as a reputation enhancing signal increasing the borrower's attractiveness as a business partner. In such case we have a channel through which a private financial intermediary contributes to the provision of a public good like information, thereby reducing the adverse consequences of market failures on the creation of economic value. According to Sen poverty should be viewed as the " deprivation of basic capabilities, 1 rather than merely as a consequence of low income " (Sen, 1999, p. 20). In this perspective development has to provide people with greater freedom and choice which implies increasing capabilities. Welfare approaches must therefore focus not only on the means but also on people's ends and on the freedoms needed to satisfy these ends. Sen identifies two types of (constitutive and instrumental) freedom. The first is the primary end while the second is the principal mean of development. Microfinance is in the category of instrumental freedom (Cabraal et al., 2006) involving freedom of access to credit for poor borrowers lacking of collateral. However, microfinance affects bor-rowers' capabilities and functionings in at least other two ways. First, if dignity and social reputation are two crucial pillars which enhance individual capabilities (or shift ahead the frontier of combination of functionings that individual are able to achieve), microfinance has a strong impact on them when it becomes, through credit concession, a channel of social inclusion. 2 Second, and not explored so far by the literature, we show with results of our paper that, if (and only if) the situation of imperfect information on individual characteristics of the experiment applies …