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Repayment Frequency in Microfinance Contracts with Present-Biased Borrowers

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  • Greg Fischer
  • Maitreesh Ghatak

Abstract

This paper analyzes the theoretical underpinnings of high-frequency repayment, afeature in nearly all microfinance contracts that has been largely overlooked bytheorists. The pervasive belief among practitioners that frequent repayment is criticalin achieving high repayment rates is puzzling. Classically rational individualsshould benefit from more flexible repayment schedules, and less frequent repaymentshould increase neither default nor delinquency. This paper proposes a simpleexplanation based on present bias. For such individuals, more frequent repaymentcan increase the maximum incentive compatible loan size. However, the welfareeffects are ambiguous. More frequent repayment can lead to over-borrowing,reducing welfare as it increases loan sizes.4

Suggested Citation

  • Greg Fischer & Maitreesh Ghatak, 2010. "Repayment Frequency in Microfinance Contracts with Present-Biased Borrowers," STICERD - Economic Organisation and Public Policy Discussion Papers Series 021, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  • Handle: RePEc:cep:stieop:021
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    References listed on IDEAS

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    1. Jain, Sanjay & Mansuri, Ghazala, 2003. "A little at a time: the use of regularly scheduled repayments in microfinance programs," Journal of Development Economics, Elsevier, vol. 72(1), pages 253-279, October.
    2. Matthew Rabin & Ted O'Donoghue, 1999. "Doing It Now or Later," American Economic Review, American Economic Association, vol. 89(1), pages 103-124, March.
    3. Xavier Giné & Dean Karlan, 2009. "Group versus Individual Liability: Long Term Evidence from Philippine Microcredit Lending Groups," Working Papers 970, Economic Growth Center, Yale University.
    4. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
    5. Craig McIntosh, 2008. "Estimating Treatment Effects from Spatial Policy Experiments: An Application to Ugandan Microfinance," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 15-28, February.
    6. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
    7. Akerlof, George A, 1991. "Procrastination and Obedience," American Economic Review, American Economic Association, vol. 81(2), pages 1-19, May.
    8. Abhijit V. Banerjee & Timothy Besley & Timothy W. Guinnane, 1994. "Thy Neighbor's Keeper: The Design of a Credit Cooperative with Theory and a Test," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 491-515.
    9. Basu, Karna, 2009. "A behavioral model of simultaneous borrowing and saving," MPRA Paper 20442, University Library of Munich, Germany.
    10. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, vol. 4(3), pages 351-366, September.
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    Citations

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    Cited by:

    1. Guha, Brishti & Chowdhury, Prabal Roy, 2013. "Micro-finance competition: Motivated micro-lenders, double-dipping and default," Journal of Development Economics, Elsevier, vol. 105(C), pages 86-102.
    2. Chowdhury, Shyamal & Chowdhury, Prabal Roy & Sengupta, Kunal, 2014. "Sequential lending with dynamic joint liability in micro-finance," Journal of Development Economics, Elsevier, vol. 111(C), pages 167-180.
    3. Francisco J. Buera & Joseph P. Kaboski & Yongseok Shin, 2012. "The Macroeconomics of Microfinance," NBER Working Papers 17905, National Bureau of Economic Research, Inc.
    4. Ahlin, Christian, 2015. "The role of group size in group lending," Journal of Development Economics, Elsevier, vol. 115(C), pages 140-155.
    5. Marc Labie & Carolina Laureti & Ariane Szafarz, 2017. "Discipline and flexibility: a behavioural perspective on microfinance product design," Oxford Development Studies, Taylor & Francis Journals, vol. 45(3), pages 321-337, July.
    6. de Quidt, Jonathan & Fetzer, Thiemo & Ghatak, Maitreesh, 2016. "Group lending without joint liability," Journal of Development Economics, Elsevier, vol. 121(C), pages 217-236.
    7. repec:eee:jeborg:v:142:y:2017:i:c:p:425-450 is not listed on IDEAS
    8. Basu, Karna, 2014. "Commitment savings in informal banking markets," Journal of Development Economics, Elsevier, vol. 107(C), pages 97-111.
    9. repec:taf:wjabxx:v:17:y:2016:i:2:p:254-272 is not listed on IDEAS
    10. Allen, Treb, 2016. "Optimal (partial) group liability in microfinance lending," Journal of Development Economics, Elsevier, vol. 121(C), pages 201-216.
    11. Shapiro, D.A., 2015. "Microfinance and dynamic incentives," Journal of Development Economics, Elsevier, vol. 115(C), pages 73-84.

    More about this item

    Keywords

    Microfinance; Repayment Frequency; Present-Bias;

    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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