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

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

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

  • Erica Field
  • Rohini Pande
  • John Papp
  • Natalia Rigol
American Economic Review
vol. 103, no. 6, October 2013
(pp. 2196–2226)
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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.

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

Additional Materials

JEL Classification

  • 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