Flexible Microcredit: Effects on Loan Repayment and Social Pressure

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