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American Economic Review Vol. 103 No. 6 2013

Does the Classic Microfinance Model Discourage Entrepreneurship Among the Poor? Experimental Evidence from India

Erica Field1; Rohini Pande2; John Papp3; Natalia Rigol4

1 Department of Economics, Duke University, 213 Social Sciences Building, Box 90097, Durham, NC 27708. · 2 Harvard Kennedy School, Harvard University, Mailbox 46, 79 JFK Street, Cambridge, MA 02138. · 3 Highbridge Capital Management, 40 West 57 Street, New York, NY 10019. · 4 Department of Economics, MIT, 50 Memorial Drive, Cambridge, MA 02142.

Abstract

Do the repayment requirements of the classic microfinance contract inhibit investment in high-return but illiquid business opportunities among the poor? Using a field experiment, we compare the classic contract which requires that repayment begin immediately after loan disbursement to a contract that includes a two-month grace period. The provision of a grace period increased short-run business investment and long-run profits but also default rates. The results, thus, indicate that debt contracts that require early repayment discourage illiquid risky investment and thereby limit the potential impact of microfinance on microenterprise growth and household poverty.

DOI
10.1257/aer.103.6.2196
Volume
103
Issue
6
Pages
2196-2226
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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