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

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 ta 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.

Speaker Details

Erica M. Field joined the Duke faculty as an associate professor in 2011. She is also a faculty research fellow at the National Bureau of Economic Research. Professor Field received her Ph.D. and M.A. in economics from Princeton University in 2003 and her B.A. in economics and Latin American studies from Vassar College in 1996. Since receiving her doctorate, she has worked at Princeton, Stanford, and most recently Harvard, where she was a professor for six years before coming to Duke.

Date:
Speakers:
Erica Field
Affiliation:
Duke