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Contractual Restrictions and Debt Traps

Author

Listed:
  • Ernest Liu

    (Princeton University)

  • Benjamin N. Roth

    (Harvard University)

Abstract

Microcredit and other forms of small-scale finance have failed to catalyze entrepreneurship in developing countries. In these credit markets, borrowers and lenders often bargain over not only the interest rate but also implicit restrictions on types of investment. We build a dynamic model of informal lending and show this may lead to endogenous debt traps. Lenders constrain business growth for poor borrowers yet richer borrowers may grow their businesses faster than they could have without credit. The theory offers nuanced comparative statics and rationalizes the low average impact and low demand of microfinance despite its high impact on larger businesses.

Suggested Citation

  • Ernest Liu & Benjamin N. Roth, 2020. "Contractual Restrictions and Debt Traps," Working Papers 2020-30, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2020-30
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    File URL: https://scholar.princeton.edu/sites/default/files/ernestliu/files/lr2020_rfs2r.pdf
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    1. Pim Pinitjitsamut & Wisarut Suwanprasert, 2022. "Informal Loans in Thailand: Stylized Facts and Empirical Analysis," PIER Discussion Papers 173, Puey Ungphakorn Institute for Economic Research.

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    More about this item

    Keywords

    credit markets; developing countries;

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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