Can Warm Glow Alleviate Credit Market Failure? Evidence from Online Peer-to-Peer Lenders
CIRPEE Working Paper 09-34
37 Pages Posted: 26 Aug 2009
Date Written: August 25, 2009
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 poor country enterprises.
Keywords: credit markets imperfections, externalities, warm glow
JEL Classification: O16, G21, D82, D62, D64
Suggested Citation: Suggested Citation