A comparison of the economic literature on microfinance and the evolutionary literature on cooperation

Abstract

Microfinance initiatives provide financial support and loans to individuals from low-income backgrounds who are otherwise excluded from mainstream banking services. They do so by providing loans to groups of individuals who are jointly liable for their repayment. This model of lending creates a cooperative dilemma because if any member of a loan group defects and does not repay his/her share of the loan, the other members of the group are liable to repay it for him/her. Maintaining cooperation among borrowers and solving the cooperative dilemma created by the microfinance model may be crucial to ensure loan repayment. A vast literature in economics identifies factors that encourage successful loan repayment in microfinance initiatives and those that prevent defaults. Here, I compare the economic literature on microfinance and the equally prolific evolutionary literature on factors that encourage and maintain cooperation among individuals. I identify parallels between these two bodies of research, which have so far developed independently. Bringing them together enables us to examine the power and limitations of applying evolutionary theory to contemporary economic issues and may stimulate novel questions and insights in both disciplines.