Microcredit Contracts, Risk Diversification and Loan Take-Up

O. Attanasio, B. Augsburg, Ralph de Haas

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Abstract

We study theoretically and empirically the demand for microcredit under different liability arrangements and risk environments. A simple theoretical model shows that the demand for joint-liability loans can exceed that for individual-liability loans when risk-averse borrowers value their long-term relationship with the lender. Joint liability then offers a way to diversify risk and to reduce the chance of losing access to future loans. We also show that the demand for loans depends negatively on the riskiness of projects. Using data from a randomized controlled trial in Mongolia we find that these model predictions hold true empirically. In particular, we use innovative data on subjective risk perceptions to show that expected project risk negatively affects the demand for loans. In line with an insurance role of joint-liability contracts,
this effect is muted in villages where joint-liability loans are available.
Original languageEnglish
Place of PublicationTilburg
PublisherEuropean Banking Center
Number of pages36
Volume2016-0003
Publication statusPublished - 23 May 2016

Publication series

NameEuropean Banking Center
Volume2016-003

Keywords

  • microcredit
  • joint liability
  • loan take-up
  • risk diversification

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