Positive Versus Negative Incentives for Loan Repayment in Microfinance: A Game Theory Approach

21 Pages Posted: 25 Apr 2019

See all articles by Thomas Brihaye

Thomas Brihaye

Université de Mons-Hainaut

Julie De Pril

Université de Mons-Hainaut

Marc Labie

Université de Mons-Hainaut

Anaïs Périlleux

Catholic University of Louvain (UCL)

Date Written: May 2019

Abstract

In most of the methodologies used so far by microfinance institutions, negative incentives are predominant, which can contrast with these institutions’ social mission. This paper investigates whether the microfinance industry could benefit from using more positive incentives. The main results of our game model are twofold. First, (positive or negative) incentives increase “on‐time” repayments. Second, the client is more likely to repay her loan with the encouragement of a bonus scheme rather than under the pressure of a sanction, regardless of the amount. This paper therefore argues for the increased use of positive incentives in the industry.

Keywords: game theory, loan repayment, microfinance, positive incentives

Suggested Citation

Brihaye, Thomas and Pril, Julie De and Labie, Marc and Périlleux, Anaïs, Positive Versus Negative Incentives for Loan Repayment in Microfinance: A Game Theory Approach (May 2019). Review of Development Economics, Vol. 23, Issue 2, pp. 577-597, 2019, Available at SSRN: https://ssrn.com/abstract=3376847 or http://dx.doi.org/10.1111/rode.12563

Thomas Brihaye

Université de Mons-Hainaut

20 Place du Parc
B - 7000 - Mons, B7000
Belgium

Julie De Pril

Université de Mons-Hainaut

20 Place du Parc
B - 7000 - Mons, B7000
Belgium

Marc Labie

Université de Mons-Hainaut ( email )

20 Place du Parc
B - 7000 - Mons, B7000
Belgium

Anaïs Périlleux (Contact Author)

Catholic University of Louvain (UCL) ( email )

Place des Doyens 1
Louvain-la-Neuve, 1348
Belgium

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