Repayment Flexibility and Risk Taking: Experimental Evidence from Credit Contracts
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http://hdl.handle.net/10045/138748
Title: | Repayment Flexibility and Risk Taking: Experimental Evidence from Credit Contracts |
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Authors: | Battaglia, Marianna | Gulesci, Selim | Madestam, Andreas |
Research Group/s: | Economía Laboral y Econometría (ELYE) |
Center, Department or Service: | Universidad de Alicante. Departamento de Fundamentos del Análisis Económico |
Keywords: | Repayment flexibility | Insurance | Credit | Microfinance | Entrepreneurship |
Issue Date: | 17-Nov-2023 |
Publisher: | Oxford University Press |
Citation: | The Review of Economic Studies. 2023. https://doi.org/10.1093/restud/rdad107 |
Abstract: | A widely held view is that small firms in developing countries are prevented from making profitable investments by lack of access to credit and insurance markets. One solution is to provide repayment flexibility in credit contracts. Repayment flexibility eases both the credit constraint, as it allows for increased spending during the startup phase, and offers insurance, in case of fluctuations in income. In a field experiment among traditional microfinance clients and larger collateralized borrowers in Bangladesh, we randomly assign the option to delay up to 2 monthly repayments at any point during a 12-month loan cycle. The flexible contract leads to substantial improvements in the traditional microfinance clients’ business outcomes, driven by borrowers in the upper tail of the distribution. In addition, we find a significant impact on socioeconomic status, combined with lower default rates. We show theoretically and empirically that these effects are induced by an increase in entrepreneurial risk taking, implying that the primary mechanism is insurance provision. Repayment flexibility also attracts less risk-averse borrowers interested in business expansion. At the same time, the effects for the larger loan are much more modest. Our findings suggest that lack of insurance is an important constraint for small firms but that a simple financial product that increases repayment flexibility can be an effective tool for enabling enterprise growth. |
URI: | http://hdl.handle.net/10045/138748 |
ISSN: | 0034-6527 (Print) | 1467-937X (Online) |
DOI: | 10.1093/restud/rdad107 |
Language: | eng |
Type: | info:eu-repo/semantics/article |
Rights: | © The Author(s) 2023. Published by Oxford University Press on behalf of The Review of Economic Studies Limited. This is an Open Access article distributed under the terms of the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction in any medium, provided the original work is properly cited. |
Peer Review: | si |
Publisher version: | https://doi.org/10.1093/restud/rdad107 |
Appears in Collections: | INV - ELYE - Artículos de Revistas |
Files in This Item:
File | Description | Size | Format | |
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Battaglia_etal_2023_RevEconStud.pdf | 1,96 MB | Adobe PDF | Open Preview | |
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