Working Paper: CEPR ID: DP7011
Authors: Mikhail Drugov; Rocco Macchiavello
Abstract: For many self-employed poor in the developing world, entrepreneurship involves experimenting with new technologies and learning about oneself. This paper explores the (positive and normative) implications of learning for the practice of lending to the poor. The optimal lending contract rationalizes several common aspects of microlending schemes, such as "mandatory saving requirements", "progressive lending" and "group funds". Joint liability contracts are, however, not necessarily optimal. Among the poorest borrowers the model predicts excessively high retention rates, the contemporaneous holding of borrowing and savings at unfavorable interest rates as well as the failure to undertake profitable and easily available investment opportunities, such as accepting larger loans to scale-up business. Further testable predictions can be used to interpret and guide the design of controlled field experiments to evaluate microlending schemes.
Keywords: credit constraints; group lending; microlending schemes; savings; scaling up; self-discovery
JEL Codes: D14; O14; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| uncertainty about borrowers' abilities (D80) | design of lending contracts (G21) |
| design of lending contracts (G21) | borrower behavior (G51) |
| contract design (K12) | investment decisions (G11) |
| joint liability contracts (K13) | effectiveness of lending strategies (G21) |
| emotional costs (D91) | borrowers' decisions (G51) |