Identity, trust and altruism: An experiment on preferences and microfinance lending

Abstract

We conduct laboratory and online experiment treatments to study willingness to lend, potential crowd out of philanthropic motivation by financial returns, and preference over borrowers in micro-finance lending. We distinguish between perceptions of transaction-related factors, such as neediness and trustworthiness, and identity-related factors such as ethnicity and gender. By looking at both channels together we are able to assess the extent to which identity-related differences in lending can be attributed to differences in how transaction-related factors are perceived among people with similar and different identities. We find that (1) both financial return and philanthropic motivation affect the amount lent, with little evidence that the former crowds out the latter; (2) lenders prefer borrowers with whom they share gender and ethnic similarity even after controlling for perceived riskiness and neediness; and (3) lenders are willing to trade greater risk in order to help more needy borrowers, but at a rate sensitive to their own degree of financial exposure. Lack of crowding out, homophily effects in some subgroups, and robustness to decision order are found in additional treatments with three subject pools, including one of non-student participants.