Flexible Microcredit: Effects on Loan Repayment and Social Pressure

59 Pages Posted: 5 Jun 2020

See all articles by Kristina Czura

Kristina Czura

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics

Anett John

CREST-ENSAE

Lisa Spantig

Ludwig Maximilian University of Munich (LMU)

Date Written: 2020

Abstract

Flexible repayment schedules allow borrowers to invest in profitable yet risky projects, but practitioners fear they erode repayment morale. We study repayment choices in rigid and flexible loan contracts that allow discretion in repayment timing. To separate strategic repayment choices from repayment capacity given income shocks, we conduct a lab-in-the-field experiment with microcredit borrowers in the Philippines. Our design allows us to observe social pressure, which is considered both central to group lending, and excessive in practice. In our rigid benchmark contract, repayment is much higher than predicted under simple payoff maximization. Flexibility reduces high social pressure, but comes at the cost of reduced loan repayment. We present theoretical and empirical evidence consistent with a strong social norm for repayment, which is weakened by the introduction of flexibility. Our results imply that cooperative behavior determined by social norms may erode if the applicability of these norms is not straightforward.

Keywords: peer punishment, social norms, microfinance, flexible repayment

JEL Classification: O160, D900, G210

Suggested Citation

Czura, Kristina and John, Anett and Spantig, Lisa, Flexible Microcredit: Effects on Loan Repayment and Social Pressure (2020). CESifo Working Paper No. 8322, Available at SSRN: https://ssrn.com/abstract=3618847

Kristina Czura (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

Anett John

CREST-ENSAE ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

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

Lisa Spantig

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

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