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Debt Traps? Market Vendors and Moneylender Debt in India and the Philippines

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  • Dean Karlan
  • Sendhil Mullainathan
  • Benjamin N. Roth

Abstract

A debt trap occurs when someone takes on a high-interest-rate loan and is barely able to pay back the interest, and thus perpetually finds themselves in debt (often by refinancing). Studying such practices is important for understanding financial decision-making of households in dire circumstances, and also for setting appropriate consumer protection policies. We conduct a simple experiment in three sites in which we paid off high-interest moneylender debt of individuals. Most borrowers returned to debt within six weeks. One to two years after intervention, treatment individuals were borrowing at the same rate as control households.

Suggested Citation

  • Dean Karlan & Sendhil Mullainathan & Benjamin N. Roth, 2019. "Debt Traps? Market Vendors and Moneylender Debt in India and the Philippines," American Economic Review: Insights, American Economic Association, vol. 1(1), pages 27-42, June.
    • Handle: RePEc:aea:aerins:v:1:y:2019:i:1:p:27-42
    Note: DOI: 10.1257/aeri.20180030
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    Cited by:

    1. Seth Garz & Xavier Gine & Dean Karlan & Rafe Mazer & Caitlin Sanford & Jonathan Zinman, 2021. "Consumer Protection for Financial Inclusion in Low- and Middle-Income Countries: Bridging Regulator and Academic Perspectives," Annual Review of Financial Economics, Annual Reviews, vol. 13(1), pages 219-246, November.
    2. Nikolov, Plamen, 2023. "Writing Tips for Crafting Effective Economics Research Papers – 2023-2024 Edition," IZA Discussion Papers 16276, Institute of Labor Economics (IZA).
    3. Altındağ, Onur & O’Connell, Stephen D., 2023. "The short-lived effects of unconditional cash transfers to refugees," Journal of Development Economics, Elsevier, vol. 160(C).
    4. Aidt, Toke & Asatryan, Zareh & Badalyan, Lusine, 2022. "Political consequences of consumer debt relief," ZEW Discussion Papers 22-049, ZEW - Leibniz Centre for European Economic Research.
    5. Rebecca Hamilton & Debora Thompson & Sterling Bone & Lan Nguyen Chaplin & Vladas Griskevicius & Kelly Goldsmith & Ronald Hill & Deborah Roedder John & Chiraag Mittal & Thomas O’Guinn & Paul Piff & Car, 2019. "The effects of scarcity on consumer decision journeys," Journal of the Academy of Marketing Science, Springer, vol. 47(3), pages 532-550, May.
    6. Leong, Kaiwen & Li, Huailu & Pavanini, Nicola & Walsh, Christoph, 2022. "The Welfare Effects of Law Enforcement in the Illegal Money Lending Market," IZA Discussion Papers 15359, Institute of Labor Economics (IZA).
    7. Hassan, Magda & Prabhu, Jaideep & Chandy, Rajesh & Narasimhan, Om, 2023. "When bulldozers loom: informal property rights and marketing practice innovation among emerging market microentrepreneurs," LSE Research Online Documents on Economics 114293, London School of Economics and Political Science, LSE Library.
    8. I. Ramsay & T. Williams, 2020. "Peering Forward, 10 Years After: International Policy and Consumer Credit Regulation," Journal of Consumer Policy, Springer, vol. 43(1), pages 209-226, March.

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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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    1. Debt Traps? Market Vendors and Moneylender Debt in India and the Philippines (AER: Insights 2019) in ReplicationWiki

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