Banking with sentiments. A model of fiduciary interactions in micro-credit programs

TitleBanking with sentiments. A model of fiduciary interactions in micro-credit programs
Publication TypeWorking Paper
Year of Publication2005
AuthorsV. Pelligra
Number2005_03
Keywordsmicrofinance, psychological game theory, trust responsiveness
Abstract

The success of many micro-credit initiatives is difficult to account for in the traditional economic framework, where, mainly because of the assumption of self-interested behaviour, credit is rationed and provided only to those able to back it with collaterals. Having analysed different alternative explanations for such a success, the paper introduces the concept of trust responsiveness in the lender-borrower relationship and formalises it in a psychological game-theoretical model aimed at explaining the unusually high rate of repayment experienced in micro-credit programs. Three well-known psychological effects are introduced to discuss the factors that may positively or negatively affect borrowers’ trustworthiness. This model provides important normative implications for institutional design.

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