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Can Warm Glow Alleviate Credit Market Failures? Evidence from Online Peer-to-Peer Lenders

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  • Matthieu Chemin
  • Joost de Laat

Abstract

This paper looks at an institutional innovation in which Western investors lend peer-to-peer to poor country enterprises. Using a unique dataset from an online lending platform called MyC4, we find that MyC4’s Western lenders grant lower interest rates to pro-poor, socially responsible (SR), and pro-female African projects, thus internalizing positive externalities. Using novel instrumental variables to account for interest rates’ endogeneity, we find that these lower interest rates substantially improve the repayment performance of borrowers, and do not reflect profit-maximizing behavior. This new way to organize finance improves credit market efficiency and the success rate of poorntry enterprises.

Suggested Citation

  • Matthieu Chemin & Joost de Laat, 2009. "Can Warm Glow Alleviate Credit Market Failures? Evidence from Online Peer-to-Peer Lenders," Cahiers de recherche 0934, CIRPEE.
    • Handle: RePEc:lvl:lacicr:0934
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    References listed on IDEAS

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    1. Craig E. Landry & Andreas Lange & John A. List & Michael K. Price & Nicholas G. Rupp, 2006. "Toward an Understanding of the Economics of Charity: Evidence from a Field Experiment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(2), pages 747-782.
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    3. Andreoni, James & Petrie, Ragan, 2008. "Beauty, gender and stereotypes: Evidence from laboratory experiments," Journal of Economic Psychology, Elsevier, vol. 29(1), pages 73-93, February.
    4. Daniel W. Elfenbein & Brian McManus, 2010. "A Greater Price for a Greater Good? Evidence That Consumers Pay More for Charity-Linked Products," American Economic Journal: Economic Policy, American Economic Association, vol. 2(2), pages 28-60, May.
    5. James Andreoni & John Miller, 2002. "Giving According to GARP: An Experimental Test of the Consistency of Preferences for Altruism," Econometrica, Econometric Society, vol. 70(2), pages 737-753, March.
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    Cited by:

    1. Jordana VIOTTO, 2015. "Competition and Regulation of Crowdfunding Platforms: A Two-sided Market Approach," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(99), pages 33-50, 3rd quart.
    2. Andreas Hoegen & Dennis M. Steininger & Daniel Veit, 2018. "How do investors decide? An interdisciplinary review of decision-making in crowdfunding," Electronic Markets, Springer;IIM University of St. Gallen, vol. 28(3), pages 339-365, August.
    3. Yang Zhao & Xuemei Xie & Liuyong Yang, 0. "Female entrepreneurs and equity crowdfunding: the consequential roles of lead investors and venture stages," International Entrepreneurship and Management Journal, Springer, vol. 0, pages 1-29.
    4. Leite, Rodrigo & Mendes, Layla & Camelo, Emmanuel, 2024. "Innovating microcredit: how fintechs change the field," Journal of Economics and Business, Elsevier, vol. 128(C).
    5. Yang Zhao & Xuemei Xie & Liuyong Yang, 2021. "Female entrepreneurs and equity crowdfunding: the consequential roles of lead investors and venture stages," International Entrepreneurship and Management Journal, Springer, vol. 17(3), pages 1183-1211, September.
    6. Susana Bernardino & J. Freitas Santos, 2020. "Crowdfunding: An Exploratory Study on Knowledge, Benefits and Barriers Perceived by Young Potential Entrepreneurs," JRFM, MDPI, vol. 13(4), pages 1-24, April.
    7. Morvinski, Coby & Shani, Yaniv, 2022. "Misaligned mindsets between borrowers and lenders of small interpersonal loans," Organizational Behavior and Human Decision Processes, Elsevier, vol. 169(C).

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    More about this item

    Keywords

    Credit markets imperfections; externalities; warm glow;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers

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