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.
|Pages (from-to)||185 - 199|
|Number of pages||15|
|Journal||Pacific Economic Review|
|Publication status||Published - 2006|