Interest rates in group lending: A behavioural investigation

Klaus Abbink, Bernd Irlenbusch, Elke Renner

Research output: Contribution to journalArticleResearchpeer-review

6 Citations (Scopus)

Abstract

Microfinance institutions (MFIs) serve more than 5 million households in developing countries. A crucial variable for MFI schemes is the interest rate to be charged from borrowers. This paper studies the behavioural impacts of the repayment burden on repayment performance. In a laboratory experiment, we vary the amount a borrower group has to repay and study how this affects free-riding behaviour. We can identify two counteracting effects: a higher repayment burden intensifies the incentives to free-ride as shirking saves more money. On the other hand, high-interest loans are less tolerant towards defaulters, which exerts a disciplining effect.
Original languageEnglish
Pages (from-to)185 - 199
Number of pages15
JournalPacific Economic Review
Volume11
Issue number2
DOIs
Publication statusPublished - 2006
Externally publishedYes

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