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

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  • 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.

Suggested Citation

  • Erica Field & Rohini Pande & John Papp & Natalia Rigol, 2013. "Does the Classic Microfinance Model Discourage Entrepreneurship among the Poor? Experimental Evidence from India," American Economic Review, American Economic Association, vol. 103(6), pages 2196-2226, October.
  • 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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    References listed on IDEAS

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    More about this item

    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
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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