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Flexible Microcredit: Effects on Loan Repayment and Social Pressure

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  • Kristina Czura
  • Anett John
  • Lisa Spantig

Abstract

Flexible repayment benefits borrowers, but practitioners fear diminished repayment morale. We study repayment choices in rigid and flexible loan contracts with discretion in repayment timing. Using a lab-in-the-field experiment with microcredit borrowers in the Philippines, we identify moral hazard and quantify social pressure. In our rigid benchmark contract, repayment is higher than payoff maximization predicts. Flexibility substantially lowers both repayment and social pressure. Our results are consistent with a strong social norm for repayment, which is weakened by introducing flexibility. This suggests that cooperative behavior determined by social norms may erode if the applicability of these norms is not straightforward.

Suggested Citation

  • Kristina Czura & Anett John & Lisa Spantig, 2020. "Flexible Microcredit: Effects on Loan Repayment and Social Pressure," CESifo Working Paper Series 8322, CESifo.
    • Handle: RePEc:ces:ceswps:_8322
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    Cited by:

    1. Benjian Wu & Yi Cui & Yushuo Jiang, 2022. "The Role of Microfinance in China’s Rural Public Health: Evidence from the Anti-Poverty Microcredit Program," IJERPH, MDPI, vol. 19(17), pages 1-22, August.
    2. Czura, Kristina & Englmaier, Florian & Ho, Hoa & Spantig, Lisa, 2022. "Microfinance loan officers before and during Covid-19: Evidence from India," World Development, Elsevier, vol. 152(C).

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    More about this item

    Keywords

    peer punishment; social norms; microfinance; flexible repayment;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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