The Risk of Collective Behavior at the Base of the Pyramid: Quasi-Experimental Evidence from Microfinance
30 Pages Posted: 15 Feb 2019
Date Written: January 22, 2019
We argue and demonstrate that serving base-of-the-pyramid (BOP) markets involves an important yet under-studied consideration: BOP customer behavior may be likely to involve collective decision-making rather than independent decisions by customers, hence increasing business risk. Our investigation of the impact of India’s 2016 demonetization policy on loan repayment for a leading microfinance firm reveals three key findings. First, missed payments went up drastically post-demonetization, especially among the poorest customers. Second, locations where all customers simultaneously missed payments increased from 1.3% pre-demonetization to 21.6% post-demonetization, with this geographic localization of missed payment behavior being significantly beyond what would be expected if borrowers made repayment decision independently. Third, the incidence of collective missed payments was higher in locations more likely to be susceptible to local political influence.
Keywords: Base of the Pyramid (BOP), Emerging Markets, Demonetization, Quasi-Experiment, Microfinance
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