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Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India

  • Bauer, Michal


    (Charles University, Prague)

  • Chytilová, Julie


    (Charles University, Prague)

  • Morduch, Jonathan


    (New York University)

Microcredit is an innovative financial tool designed to reduce poverty and fix credit market imperfections. We use experimental measures of time discounting and risk aversion for villagers in south India to highlight behavioral features of microcredit. Conditional on borrowing from any source, women with present-biased preferences are more likely than others to borrow through microcredit institutions. Microcredit contracts require loan repayments in regular, fixed installments and they harness peer pressure to encourage discipline. These innovations mirror mechanisms highlighted in behavioral approaches to saving, suggesting that microcredit's popularity stems partly from modes of encouragement and self-discipline absent in typical lending mechanisms.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4901.

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Length: 47 pages
Date of creation: Apr 2010
Date of revision:
Publication status: published in: American Economic Review, 2012, 102 (2), 1118-1139
Handle: RePEc:iza:izadps:dp4901
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