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

47 Pages Posted: 3 May 2010

See all articles by Michal Bauer

Michal Bauer

Charles University in Prague - Institute of Economic Studies; CERGE-EI

Julie Chytilová

Charles University in Prague - Department of Economics

Jonathan Morduch

New York University (NYU) - Robert F. Wagner Graduate School of Public Service; New York University (NYU) - Department of Economics

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.

Keywords: time preference, hyperbolic discounting, self-control, loan contracts, microfinance

JEL Classification: C93, D91, O12

Suggested Citation

Bauer, Michal and Chytilová, Julie and Morduch, Jonathan, Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India. IZA Discussion Paper No. 4901, Available at SSRN: https://ssrn.com/abstract=1598959 or http://dx.doi.org/10.2139/ssrn.1598959

Michal Bauer (Contact Author)

Charles University in Prague - Institute of Economic Studies ( email )

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CERGE-EI ( email )

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Julie Chytilová

Charles University in Prague - Department of Economics ( email )

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Prague 1, 163 00
Czech Republic

HOME PAGE: http://ies.fsv.cuni.cz/index.php?module=kernel&action=user&id_user=130&lng=cs_CZ

Jonathan Morduch

New York University (NYU) - Robert F. Wagner Graduate School of Public Service ( email )

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United States
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New York University (NYU) - Department of Economics ( email )

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New York, NY 10011
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HOME PAGE: http://www.nyu.edu/projects/morduch

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