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Interest Rates In Group Lending: A Behavioural Investigation

  • Klaus Abbink
  • Bernd Irlenbusch
  • Elke Renner

Microfinance institutions (MFIs) serve more than 5 million households in developing countries. A crucial variable for MFI schemes is the interest rate to be charged from borrowers. This paper studies the behavioural impacts of the repayment burden on repayment performance. In a laboratory experiment, we vary the amount a borrower group has to repay and study how this affects free-riding behaviour. We can identify two counteracting effects: a higher repayment burden intensifies the incentives to free-ride as shirking saves more money. On the other hand, high-interest loans are less tolerant towards defaulters, which exerts a disciplining effect. Copyright 2006 Blackwell Publishing Ltd

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Article provided by Wiley Blackwell in its journal Pacific Economic Review.

Volume (Year): 11 (2006)
Issue (Month): 2 (06)
Pages: 185-199

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Handle: RePEc:bla:pacecr:v:11:y:2006:i:2:p:185-199
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