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Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India Image

Promoting Inclusive Markets and Financial Systems

Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India

Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India

Summary

This paper uses experimental measures of time discounting and risk aversion for villagers in south India to highlight behavioral features of microcredit.Conditional on borrowing from any source, women with present-biased preferences are more likely than others to borrow through microcredit institutions. Microcredit contracts require loan repayments in regular, fixed installments and they harness peer pressure to encourage discipline. These innovations mirror mechanisms highlighted in behavioral approaches to saving, suggesting that microcredit’s popularity stems pand self-discipline absent in typical lending mechanisms.

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