Enhancing capabilities through credit access: Creditworthiness as a signal of trustworthiness under asymmetric information

Creditworthiness and trustworthiness are almost synonyms because, under asymmetric information, the act of conferring a loan has the indirect effect of signaling the trustworthiness of the borrower. We test the creditworthiness/trustworthiness nexus in an investment game experiment on a sample of participants/non-participants in a microfinance program in Argentina and find that trustors give significantly more to (and believe they will receive more from) microfinance borrowers. The first- and second-order beliefs of trustees are also consistent with this picture. Our findings then show that MF participants appear more trustworthy and this may help microfinance to work. A related consequence is that, if (and only if) borrower's trustworthiness is not public information, the mere loan provision acts as a reputation enhancing signal increasing the borrower's attractiveness as a business partner. In such case we have a channel through which a private financial intermediary contributes to the provision of a public good like information, thereby reducing the adverse consequences of market failures on the creation of economic value.

Research Highlights
► Creditworthiness is a signal of trustworthiness under asymmetric information.
► Trustors give more to microfinance borrowers. The latter are more trustworthy.
► Microfinance creates social capital under the form of trustworthiness.
► The loan provision increases the borrower's attractiveness as a business partner.
► Microfinance provides the information necessary to reduce market failures.