INFORMAL LENDING AND OTHER-REGARDING MOTIVES: FURTHER EVIDENCE FROM CHOICE EXPERIMENT IN RURAL CHINA

Abstract

Though informal lending and borrowing are widely prevalent among close acquaintances in rural areas of developing economies, these informal transactions have not been extensively researched in agricultural communities. As it stands, a risk-sharing motive has been advanced as an important explanation of such informal exchanges. However, this fails to incorporate social preferences such as altruism, trust, reciprocity, and fairness. The primary contribution of this paper is to investigate fairness reciprocity as an important motive underlying informal financial transactions among friends and relatives. Evidence from our choice experiment in China suggests that fairness could be advanced as an important motive in informal financial transactions.