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

Author

Listed:
  • Bauer, Michal

    () (Charles University, Prague)

  • Chytilová, Julie

    () (Charles University, Prague)

  • Morduch, Jonathan

    () (New York University)

Abstract

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.

Suggested Citation

  • Bauer, Michal & Chytilová, Julie & Morduch, Jonathan, 2010. "Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India," IZA Discussion Papers 4901, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp4901
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    More about this item

    Keywords

    time preference; hyperbolic discounting; self-control; microfinance; loan contracts;
    All these keywords.

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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