Implicit and Explicit Commitment in Credit and Saving Contracts: A Field Experiment

73 Pages Posted: 7 May 2019

See all articles by Uzma Afzal

Uzma Afzal

University of Nottingham; Lahore School of Economics - Center for Research in Economics and Business

Giovanna D'Adda

Milano University

Marcel Fafchamps

Stanford University - Freeman Spogli Institute for International Studies

Simon Quinn

University of Oxford

Farah Said

Centre for Research in Economics and Business, Lahore School of Economics

Date Written: May 2019

Abstract

We conduct a field experiment to test the demand for flexibility and for soft and hard commitment among clients of a microfinance institution. We offer a commitment contract inspired by the rotating structure of a ROSCA. Additional treatments test ex ante demand for soft commitment (in the form of reminders), hard commitment (in the form of a penalty for missing an installment), and flexibility (an option to postpone an installment). Our design is unique in the literature for allowing us to test — using the same respondent population — how demand for explicit commitment features differs between loan and savings contracts. We find substantial demand for both credit and savings contracts but no demand for additional commitment features — either in isolation or in combination — in spite of their effectiveness in improving repayment. In particular, demand for savings is insensitive to explicit commitment features. Individuals offered loans actively dislike commitment and flexibility, unless the latter is combined with reminders. These findings complement a literature showing that commitment devices induce financial discipline. They show that demand for commitment depends on whether commitment features are implicit or explicit.

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Suggested Citation

Afzal, Uzma and D'Adda, Giovanna and Fafchamps, Marcel and Quinn, Simon R. and Said, Farah, Implicit and Explicit Commitment in Credit and Saving Contracts: A Field Experiment (May 2019). NBER Working Paper No. w25802, Available at SSRN: https://ssrn.com/abstract=3383301

Uzma Afzal (Contact Author)

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

Lahore School of Economics - Center for Research in Economics and Business ( email )

Intersection Main Boulevard
Phase VI DHA and Burki Road
Burki, Lahore 54000
Pakistan

Giovanna D'Adda

Milano University ( email )

Via C. Saldini 50
Milano, 20133
Italy

Marcel Fafchamps

Stanford University - Freeman Spogli Institute for International Studies ( email )

Stanford, CA 94305
United States

Simon R. Quinn

University of Oxford ( email )

Farah Said

Centre for Research in Economics and Business, Lahore School of Economics ( email )

Intersection DHA VI and Burki
Burki
Lahore, Punjab 53200
Pakistan

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