Informal lending, Interdependent Utility and Other-Regarding Motives : Further Evidence from an in-the-field Choice Experiment in Rural China

In this study we investigated informal transactions amongst Chinese farmers through the lens of social interactions. Along these lines we developed a theoretical model to investigate kindness and the conditions under which a fairness equilibrium in informal credit markets might operate. We use an in-the-field discrete choice experiment to approximate our utility interdependence specification. These include the nature of the relationship between lender and borrower; beliefs from previous interactions about what action the borrower might take; and higher order interactions such as social and peer pressures to make familial loans. Attributes include the loan amount, repayment terms and interest rates and likelihood of payoff (based on borrower reputation) and to capture emotional kindness including inequity aversion, we include attributes related to relative financial position and loan purpose. Using conditional and mixed logit models, we find statistic support for both rational kindness and emotional kindness in ways that are consistent with mutual-max and mutual-min outcomes