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Repayment frequency in microfinance contracts with present-biased borrowers

Fischer, Greg and Ghatak, Maitreesh (2010) Repayment frequency in microfinance contracts with present-biased borrowers. Economic Organisation and Public Policy Discussion Papers (EOPP 021). Suntory and Toyota International Centres for Economics and Related Disciplines, London, UK.

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Abstract

This paper analyzes the theoretical underpinnings of high-frequency repayment, a feature in nearly all microfinance contracts that has been largely overlooked by theorists. The pervasive belief among practitioners that frequent repayment is critical in achieving high repayment rates is puzzling. Classically rational individuals should benefit from more flexible repayment schedules, and less frequent repayment should increase neither default nor delinquency. This paper proposes a simple explanation based on present bias. For such individuals, more frequent repayment can increase the maximum incentive compatible loan size. However, the welfare effects are ambiguous. More frequent repayment can lead to over-borrowing, reducing welfare as it increases loan sizes.4

Item Type: Monograph (Report)
Official URL: http://sticerd.lse.ac.uk/
Additional Information: © 2010 The Authors
Divisions: STICERD
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Sets: Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Date Deposited: 23 Jul 2014 14:53
Last Modified: 07 Jul 2020 23:27
URI: http://eprints.lse.ac.uk/id/eprint/58184

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