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

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Author Info

  • Erica Field
  • Rohini Pande
  • John Papp
  • Natalia Rigol

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.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 103 (2013)
Issue (Month): 6 (October)
Pages: 2196-2226

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Handle: RePEc:aea:aecrev:v:103:y:2013:i:6:p:2196-2226

Note: DOI: 10.1257/aer.103.6.2196
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Cited by:
  1. Giné, Xavier & Karlan, Dean S., 2014. "Group versus individual liability: Short and long term evidence from Philippine microcredit lending groups," Journal of Development Economics, Elsevier, vol. 107(C), pages 65-83.

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