Interest Rates in Group Lending: A Behavioural Investigation

15 Pages Posted: 12 Jun 2006

See all articles by Klaus Abbink

Klaus Abbink

University of Nottingham - School of Economics

Bernd Irlenbusch

London School of Economics & Political Science - Department of Management; IZA Institute of Labor Economics

Elke Renner

University of Nottingham

Abstract

Microfinance institutions (MFIs) serve more than 5 million households in developing countries. A crucial variable for MFI schemes is the interest rate to be charged from borrowers. This paper studies the behavioural impacts of the repayment burden on repayment performance. In a laboratory experiment, we vary the amount a borrower group has to repay and study how this affects free-riding behaviour. We can identify two counteracting effects: a higher repayment burden intensifies the incentives to free-ride as shirking saves more money. On the other hand, high-interest loans are less tolerant towards defaulters, which exerts a disciplining effect.

Suggested Citation

Abbink, Klaus and Irlenbusch, Bernd and Renner, Elke, Interest Rates in Group Lending: A Behavioural Investigation. Pacific Economic Review, Vol. 11, No. 2, pp. 185-199, June 2006. Available at SSRN: https://ssrn.com/abstract=906915 or http://dx.doi.org/10.1111/j.1468-0106.2006.00309.x

Klaus Abbink

University of Nottingham - School of Economics ( email )

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Bernd Irlenbusch

London School of Economics & Political Science - Department of Management ( email )

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IZA Institute of Labor Economics

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Elke Renner (Contact Author)

University of Nottingham ( email )

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Nottingham, NG8 1BB
United Kingdom

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