Working Paper: CEPR ID: DP12666
Authors: Dean Karlan; Sendhil Mullainathan; Benjamin Roth
Abstract: A 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 re-financing). 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.
Keywords: debt; moneylender; household finance
JEL Codes: D12; D91; O12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Debt relief (F34) | Reduction in likelihood of borrowing from moneylenders (G21) |
| Debt relief (F34) | Reduction in amount borrowed (G51) |
| Debt relief (Philippines 2007) (F35) | Reduction in likelihood of borrowing from moneylenders (G21) |
| Financial training (G53) | Borrowing behavior (G51) |
| Debt relief effects (H63) | Borrowing behavior over time (D15) |