Last updated on March 4, 2012
(It’s Spring Break here this week, so I am taking the week off from blogging to work to revise a few articles and begin working on new research projects. As a result, I am re-posting old posts that some new readers might have missed but which were very popular the first time I posted them. The following was initially posted on September 8, 2011.)
This is the title of a new paper in Economic Development and Cultural Change by Jean-Marie Baland, Catherine Guirkinger, and Charlotte Mali. Because EDCC does not publish abstracts, here is the abstract of a previous version:
“From field observations of credit cooperatives in Cameroon, we find that a substantial number of members take loans that are fully collateralized by savings they held in the same institutions. 20% of the loans observed fall into this category. The price paid in terms of net interest payments is not negligible as it represents 13% of the amount borrowed. As traditional arguments such as credit rating or time inconsistent preferences cannot explain such behavior in our specific setting, we propose a new rationale based on in-depth interviews with members of the cooperatives. Those interviews indicate that some members systematically use credit as a way to pretend that they are too poor to have available savings. By doing so, they can successfully oppose request for financial help from friends and relatives. We develop a signaling model to analyze the conditions under which this behavior is an equilibrium outcome.”
In other words, people pretend to be poor by borrowing just so they can credibly show their friends and family members that they have an outstanding loan, and thus that it would be difficult for them to make loans to these same friends and family members.
When Catherine first told me about this phenomenon, I was not surprised as I’d heard about it in a seminar in graduate school back in 2002 or 2003, when we were discussing possible explanations for a landlord’s preference for crop over cash in a land tenancy agreement beyond risk aversion. One of my colleagues back then — who had years of field experience in Cameroon — had then suggested that landlords may ask for crop so as to not have cash on hand in order to avoid having to say “no” to friends and family members asking for cash. This makes me wonder if sharecropping or crop fixed rent contracts are prevalent in Cameroon.
I had been looking forward to seeing this paper in print ever since Catherine had presented it at a conference in 2007. This paper is also a rare example of an empirical investigation of signaling.