Agricultural Finance Review

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.