Flexible Microcredit: Effects on Loan Repayment and Social Pressure

70 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 benefits borrowers, but practitioners fear diminished repayment morale. We study repayment choices in rigid and flexible loan contracts with discretion in repayment timing. Using a lab-in-the-field experiment with microcredit borrowers in the Philippines, we identify moral hazard and quantify social pressure. In our rigid benchmark contract, repayment is higher than payoff maximization predicts. Flexibility substantially lowers both repayment and social pressure. Our results are consistent with a strong social norm for repayment, which is weakened by introducing flexibility. This suggests 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 or http://dx.doi.org/10.2139/ssrn.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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