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Positive versus negative incentives for loan repayment in microfinance: A game theory approach

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  • Thomas Brihaye
  • Julie De Pril
  • Marc Labie
  • Anaïs Périlleux

Abstract

In most of the methodologies used so far by microfinance institutions, negative incentives are predominant, which can contrast with these institutions’ social mission. This paper investigates whether the microfinance industry could benefit from using more positive incentives. The main results of our game model are twofold. First, (positive or negative) incentives increase “on‐time” repayments. Second, the client is more likely to repay her loan with the encouragement of a bonus scheme rather than under the pressure of a sanction, regardless of the amount. This paper therefore argues for the increased use of positive incentives in the industry.

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  • Thomas Brihaye & Julie De Pril & Marc Labie & Anaïs Périlleux, 2019. "Positive versus negative incentives for loan repayment in microfinance: A game theory approach," Review of Development Economics, Wiley Blackwell, vol. 23(2), pages 577-597, May.
    • Handle: RePEc:bla:rdevec:v:23:y:2019:i:2:p:577-597
    DOI: 10.1111/rode.12563
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    Cited by:

    1. Tristan Caballero-Montes, 2023. "Integrating market conditions into regulatory decisions on microfinance interest rates: does competition matter?," Annals of Finance, Springer, vol. 19(2), pages 201-232, June.
    2. Marc Labie & Carolina Laureti & Ariane Szafarz, 2016. "Discipline and Flexibility: A Behavioral Perspective on Product Design in Microfinance," Working Papers CEB 15-020, ULB -- Universite Libre de Bruxelles.

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