Does the classic microfinance model discourage entrepreneurship among the poor? Experimental evidence from India

Published

Journal Article

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.

Full Text

Duke Authors

Cited Authors

  • Field, E; Pande, R; Papp, J; Rigol, N

Published Date

  • October 1, 2013

Published In

Volume / Issue

  • 103 / 6

Start / End Page

  • 2196 - 2226

International Standard Serial Number (ISSN)

  • 0002-8282

Digital Object Identifier (DOI)

  • 10.1257/aer.103.6.2196

Citation Source

  • Scopus