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Microequity and Mutuality: Experimental Evidence on Credit with Performance-Contingent Repayment

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Listed:
  • Francesco Cordaro
  • Marcel Fafchamps
  • Colin Mayer
  • Muhammad Meki
  • Simon Quinn
  • Kate Roll

Abstract

We conduct the first field experiment of a performance-contingent microfinance contract. A large food multinational wishes to help micro-distributors in its supply chain with the financing of a productive asset. Working with the firm in Kenya, we compare asset financing under a traditional debt contract to three alternatives: (i) a novel equity-like financing contract, (ii) a hybrid debt-equity contract, and (iii) an index-insurance financing contract. Experimental results reveal large positive impacts from the contractual innovations. These findings demonstrate the economic appeal of microfinance contracts that leverage improved observability of performance to achieve a greater sharing of risk and reward.

Suggested Citation

  • Francesco Cordaro & Marcel Fafchamps & Colin Mayer & Muhammad Meki & Simon Quinn & Kate Roll, 2022. "Microequity and Mutuality: Experimental Evidence on Credit with Performance-Contingent Repayment," NBER Working Papers 30411, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30411
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    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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