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Repayment flexibility in microfinance contracts : theory and experimental evidence on take up and selection

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Barboni, Giorgia (2017) Repayment flexibility in microfinance contracts : theory and experimental evidence on take up and selection. Journal of Economic Behavior & Organization, 142 . pp. 425-450. doi:10.1016/j.jebo.2017.07.020

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Official URL: http://dx.doi.org/10.1016/j.jebo.2017.07.020

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Abstract

This paper studies the impact of introducing repayment flexibility in microfinance contracts. I build an adverse selection model that predicts the existence of a separating equilibrium where lenders are able to achieve higher profits by simultaneously offering a rigid and a flexible repayment schedule, instead of just a rigid contract. Lab-in-the field games with Indian microentrepreneurs confirm the model predictions. I offer subjects both a flexible and a rigid repayment schedule and exogenously vary the price of the flexible schedule. I find that high-revenues borrowers are more likely to take up the flexible schedule than low-revenues ones, and even more so when the flexible schedule is more expensive than the rigid one. Risk-averse borrowers, on the contrary, are more likely to stick to the rigid contract when this is cheaper than the flexible contract. The paper thus indicates that lenders should offer a menu of contracts where the flexible and the rigid contract are provided simultaneously, at different prices. Back-of-the-envelope calculations indeed suggest that this mixed contract is more profitable than the standard, rigid microfinance contract.

Item Type: Journal Article
Divisions: Faculty of Social Sciences > Warwick Business School > Finance Group
Faculty of Social Sciences > Warwick Business School
Journal or Publication Title: Journal of Economic Behavior & Organization
Publisher: Elsevier BV * North-Holland
ISSN: 0167-2681
Official Date: October 2017
Dates:
DateEvent
October 2017Published
24 July 2017Available
14 July 2017Accepted
Volume: 142
Page Range: pp. 425-450
DOI: 10.1016/j.jebo.2017.07.020
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access

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