Rethinking Microloan Defaults

29 Pages Posted: 5 Dec 2017

See all articles by Matthew Jordan

Matthew Jordan

Yale University

William T. Dickens

Northeastern University - Department of Economics; Federal Reserve Banks - Federal Reserve Bank of Boston; Brookings Institution

Oliver Hauser

University of Exeter Business School - Department of Economics; Harvard University

David G. Rand

Massachusetts Institute of Technology (MIT)

Date Written: November 30, 2017

Abstract

Microcredit—the distribution of small, uncollateralized but jointly liable loans to the poorest of the poor—has been touted as a powerful approach for combatting global poverty. While some microcredit programs enjoy high repayment rates, others face unsustainably high default rates. Efforts to improve the sustainability of microcredit by reducing default rates have typically focused on increasing the likelihood that individuals repay their share of the loan by applying lessons from social dilemmas research. Here, we argue that defaults are driven more by the response of other group members to delinquent groupmates. Even in the absence of any free-rider problem, some people will be unable to make their payments on any given occasion due to bad luck. It is other group members’ unwillingness to pitch in extra that leads to default. To support this argument, we utilize the Ultimatum Game (UG), behavioral economics’ standard paradigm for measuring one’s aversion to inequitable outcomes. First, we show that country-level variation in microloan default rates is strongly correlated (overall r = 0.81) with country-level UG rejection rates observed in a recent meta-analysis of cross-cultural UG experiments from 13 countries (but not correlated with various measures related to free-riding). We then introduce a laboratory model “Microloan Game,” and present evidence that defaults arise from inequity averse individuals refusing to make up the difference when others fail to pay their fair share. This perspective suggests a suite of new approaches for combatting defaults that leverage findings on reducing UG rejections, rather than deterring free-riding.

Keywords: microcredit, behavioral economics, inequity aversion, experimental game theory, group decision-making

Suggested Citation

Jordan, Matthew and Dickens, William T. and Hauser, Oliver and Rand, David G., Rethinking Microloan Defaults (November 30, 2017). Available at SSRN: https://ssrn.com/abstract=3080637 or http://dx.doi.org/10.2139/ssrn.3080637

Matthew Jordan (Contact Author)

Yale University ( email )

New Haven, CT 06520
United States

William T. Dickens

Northeastern University - Department of Economics ( email )

301 Lake Hall
Boston, MA 02115
United States

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Brookings Institution ( email )

1775 Massachusetts Ave. NW
Economic Studies
Washington, DC 20036-2188
United States

Oliver Hauser

University of Exeter Business School - Department of Economics ( email )

Streatham Court
Exeter, EX4 4RJ
United Kingdom

HOME PAGE: http://www.oliverhauser.org

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

HOME PAGE: http://www.hauseroliver.com

David G. Rand

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

HOME PAGE: http://www.daverand.org

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