Risk-Aversion Heterogeneous Treatment Effects
RCTReview
Standard microfinance contract designs assume homogeneous borrower responses, ignoring how underlying client risk aversion interacts with immediate repayment demands to suppress high-return, illiquid capital investments among risk-sensitive poor entrepreneurs.
Picture this
If you are a cautious driver, driving a car with sensitive brakes on a steep mountain path makes you drive at five miles per hour out of fear. But if someone installs an emergency catch net along the cliff edge, you finally feel safe enough to drive at normal speed and reach your destination much faster.
What the evidence says
The grace period contract increased monthly profits for risk-averse clients (48.5% of the sample) by 92.0% (Rs 1,207.7 to Rs 1,543.6 higher profits, p < 0.05), whereas risk-loving clients experienced no statistically significant additional profit gain (interaction coefficient -Rs 1,243.5 to -Rs 1,557.9).
- Who was studied
- N = 713 low-income female microfinance clients in Kolkata, India.
- How
- RCT analyzing heterogeneous treatment effects on monthly profit based on baseline risk preferences measured via an eight-question lottery choice index.
What to do
Administer baseline risk-preference diagnostic assessments during MFI loan intake to selectively match risk-averse borrowers with deferred repayment contracts.
From the source
"The largest average treatment effects we estimate are on the subpopulation of risk-averse clients, which encompasses 48.5 percent of our sample. The estimate in row 1 of column 1 implies a 92.0 percent increase in profits among clients in this group."
101_290 microfinance and entrepreneurship AER2013.pdf