Does the Classic Microfinance Model Discourage Entrepreneurship among the Poor? Experimental Evidence from India
AbstractDo 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.
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 103 (2013)
Issue (Month): 6 (October)
Find related papers by JEL classification:
- A21 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Pre-college
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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