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American Economic Review: Vol. 103 No. 6 (October 2013)

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Does the Classic Microfinance Model Discourage Entrepreneurship among the Poor? Experimental Evidence from India

Article Citation

Field, Erica, Rohini Pande, John Papp, and Natalia Rigol. 2013. "Does the Classic Microfinance Model Discourage Entrepreneurship among the Poor? Experimental Evidence from India." American Economic Review, 103(6): 2196-2226.

DOI: 10.1257/aer.103.6.2196

Abstract

Do the repayment requirements of the classic microfinance contract inhibit investment in high-return but illiquid business opportunities among the poor? Using a field experiment, we compare the classic contract which requires that repayment begin immediately after loan disbursement to a contract that includes a two-month grace period. The provision of a grace period increased short-run business investment and long-run profits but also default rates. The results, thus, indicate that debt contracts that require early repayment discourage illiquid risky investment and thereby limit the potential impact of microfinance on microenterprise growth and household poverty.

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Download Data Set (154.39 KB) | Online Appendix (955.03 KB) | Author Disclosure Statement(s) (172.29 KB)

Authors

Field, Erica (Duke U)
Pande, Rohini (Harvard U)
Papp, John (Highbridge Capital Management, New York, NY)
Rigol, Natalia (MIT)

JEL Classifications

A21: Economic Education and Teaching of Economics: Pre-college
G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
I32: Measurement and Analysis of Poverty
L25: Firm Performance: Size, Diversification, and Scope
L26: Entrepreneurship
O15: Economic Development: Human Resources; Human Development; Income Distribution; Migration
O16: Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance


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