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Do Risky Microfinance Borrowers Really Invest in Risky Projects? Experimental Evidence from Bolivia

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  • Eliana Zeballos
  • Alessandra Cassar
  • Bruce Wydick

Abstract

This paper reports the results of an experiment testing a fundamental assumption in Stiglitz and Weiss' (1981) model of credit rationing: that defaulting borrowers are associated with investment in risky projects. Through an artefactual field experiment with 200 Bolivian microfinance borrowers, we observe that subjects from real-world delinquent borrowing groups do not prefer risky projects to safer ones significantly more than subjects from repaying groups. Instead, our results support more recent behavioural theories of credit market failure. Implications are that defaulting microfinance borrowers may be those who take too little investment risk rather than those who take too much.

Suggested Citation

  • Eliana Zeballos & Alessandra Cassar & Bruce Wydick, 2014. "Do Risky Microfinance Borrowers Really Invest in Risky Projects? Experimental Evidence from Bolivia," Journal of Development Studies, Taylor & Francis Journals, vol. 50(2), pages 276-287, February.
  • Handle: RePEc:taf:jdevst:v:50:y:2014:i:2:p:276-287
    DOI: 10.1080/00220388.2013.858124
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    File URL: http://hdl.handle.net/10.1080/00220388.2013.858124
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    References listed on IDEAS

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    1. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
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    Cited by:

    1. Marc Labie & Carolina Laureti & Ariane Szafarz, 2016. "Discipline and Flexibility: A Behavioral Perspective on Product Design in Microfinance," Working Papers CEB 15-020, ULB -- Universite Libre de Bruxelles.

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