Microfinance institutions and other lenders in developing countries rely on the promise of future loans to induce repayment. However, if borrowers expect that others will default, and so loans will no longer be available in the future, then they will default as well. We refer to such contagion as a borrower run. The optimal lending contract must provide additional repayment incentives to counter this tendency to default.
|Date of creation:||May 2008|
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|Publication status:||published in Journal of Development Economics, March 2009, v. 88, iss. 2, pp. 185-91.|
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