Debt Traps? Market Vendors and Moneylender Debt in India and the Philippines
- (pp. 27-42)
AbstractA debt trap occurs when someone takes on a high-interest-rate loan and is barely able to pay back the interest, and thus perpetually finds themselves in debt (often by refinancing). Studying such practices is important for understanding financial decision-making of households in dire circumstances, and also for setting appropriate consumer protection policies. We conduct a simple experiment in three sites in which we paid off high-interest moneylender debt of individuals. Most borrowers returned to debt within six weeks. One to two years after intervention, treatment individuals were borrowing at the same rate as control households.
CitationKarlan, Dean, Sendhil Mullainathan, and Benjamin N. Roth. 2019. "Debt Traps? Market Vendors and Moneylender Debt in India and the Philippines." American Economic Review: Insights, 1 (1): 27-42. DOI: 10.1257/aeri.20180030
- D14 Household Saving; Personal Finance
- D18 Consumer Protection
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making