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Repayment Frequency in Microfinance Contracts with Present-Biased Borrowers

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  • Greg Fischer
  • Maitreesh Ghatak

Abstract

This paper analyzes the theoretical underpinnings of high-frequency repayment, afeature in nearly all microfinance contracts that has been largely overlooked bytheorists. The pervasive belief among practitioners that frequent repayment is criticalin achieving high repayment rates is puzzling. Classically rational individualsshould benefit from more flexible repayment schedules, and less frequent repaymentshould increase neither default nor delinquency. This paper proposes a simpleexplanation based on present bias. For such individuals, more frequent repaymentcan increase the maximum incentive compatible loan size. However, the welfareeffects are ambiguous. More frequent repayment can lead to over-borrowing,reducing welfare as it increases loan sizes.4

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File URL: http://sticerd.lse.ac.uk/dps/eopp/eopp21.pdf
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Bibliographic Info

Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Economic Organisation and Public Policy Discussion Papers Series with number 021.

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Date of creation: Jul 2010
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Handle: RePEc:cep:stieop:021

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Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

Related research

Keywords: Microfinance; Repayment Frequency; Present-Bias;

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References

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  1. Xavier Giné & Dean Karlan, 2009. "Group versus Individual Liability: Long Term Evidence from Philippine Microcredit Lending Groups," Working Papers 970, Economic Growth Center, Yale University.
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Cited by:
  1. Brishti Guha & Prabal Roy Chowdhury, 2012. "Micro-finance competition: Motivated micro-lenders, double-dipping and default," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 12-01, Indian Statistical Institute, New Delhi, India.
  2. Basu, Karna, 2014. "Commitment savings in informal banking markets," Journal of Development Economics, Elsevier, vol. 107(C), pages 97-111.

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