Original source
Does the Classic Microfinance Model Discourage Entrepreneurship Among the Poor? Experimental Evidence from India
Journal article · American Economic Review · 103(6), 2196–2226 · Version date: October 2013
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Capital Compounding in Microenterprises
"A simple accounting exercise verifies that these differences, though large, are consistent with a return differential of 2 percent per month... generated by the initial difference in investment behavior followed by compounding of these returns over the next three years."
Classic Grameen Repayment Model
"Early initiation of repayment is widely considered an important means by which the classic 'Grameen model' limits lending risk."
Corporate Debt Maturity and Risk-Taking
"In contrast, the idea that the structure of debt contracts influences entrepreneurial risk-taking and investment exists in many corporate finance models."
Entrepreneurial Risk-Taking and Business Diversification
"In the long run (three years after they received their loans) they reported riskier business practices which reflect a greater willingness to reduce their access to liquid funds and experiment with product and client diversification..."
Fire-Sale Inventory Liquidation Loss
"On average households said that they could only retrieve 37 percent of their inventory's original value if they had to sell their stock in a one-day period."
Grace Period Debt Contract
"The provision of a grace period increased short-run business investment and long-run profits but also default rates. The results, thus, indicate that debt contracts that require early repayment discourage illiquid risky investment and thereby limit the potential impact of microfinance on microenterprise growth and household poverty."
Habit Formation Hypothesis in Repayment
"An alternative explanation for the default result is habit formation: a grace period may prevent clients from acquiring regular payment habits... In contrast, columns 5-7 of Table 3 indicate that grace period and regular clients were equally likely to make their first payment and just as likely to repay at least half of the loan."
Household Income Shock Vulnerability
"over the last month 62 percent report a shock to household income and 16 percent report having missed days of work due to a household shock"
High-Return Illiquid Business Opportunities
"In the presence of borrowing constraints, illiquid investments are likely to be riskier since they reduce clients' ability to deal with shocks. Consistent with this interpretation, we find evidence of heightened risk-taking among grace period clients."
Time Preferences and Flexible Debt Utilization
"Similarly, grace period contracts may be poorly utilized by present-biased clients (Fischer and Ghatak 2010)."
Imperfect Labor Substitutability in Microenterprises
"The fact that scale of business operations adjusts more rapidly than size of the microenterprise workforce is consistent with imperfect substitutability between outside and in-family labor."
Individual Liability in Group Lending Settings
"All loans were individual liability contracts, and once repayment began, clients repaid at an identical frequency."
Informal Savings in Physical Assets
"the majority (five) of clients reported incremental purchase of housing materials (including bricks and bags of concrete) which they stored for up to a month prior to construction... Housing materials were preferred to cash on hand both because they are harder to steal, and because liquidation for personal consumption imposes transactions costs on household members"
Informal Risk-Sharing via Group Meeting Frequency
"The grace period could also restrict social networking among group members and thereby increase default by lowering informal insurance. However, a group-level index of network ties between group members... shows no difference across contract types."
Loan Officer Monitoring Neutrality
"Another concern is that a grace period prevents monitoring of client activities by loan officers' ability early on in the loan cycle. However, we do not consider this to be an important channel since loan officers did not undertake monitoring activities..."
High Marginal Return to Microenterprise Capital
"The point estimates imply monthly returns of 13.0 percent for the full sample (column 2) and 11 percent for the top coded sample (column 4)... corresponding to a monthly return of capital of 11.0 percent."
Microcredit Asymmetric Information Market Failure
"The calibration suggests that asymmetric information in credit markets is an important reason for the absence of grace period contracts..."
Microenterprise Survival via Debt Flexibility
"grace period clients are less likely to report a business closure between loan disbursal and the three-year follow-up: 38.6 percent of the regular clients but only 31.4 percent of grace period clients report a business closure."
Moral Hazard Repayment Elasticity
"No separating equilibrium exists beyond an elasticity of 0.46, which is significantly lower than what has been estimated experimentally in other settings"
Multi-Dimensional Responsiveness Index
"Accounting for average profits in the corresponding subsamples, our treatment effects on the treated imply an increase in profits of 20.9 percent for the 35 percent of the sample with two non-responder traits, 70.9 percent for the 36 percent of the sample with one non-responder trait, and 109.2 percent for the 10 percent of the sample with zero non-responder traits."
Entrepreneurial Venture Creation Rate
"Microenterprise investment was approximately 6.0 percent higher and the likelihood of starting a new business was more than twice as high among clients who received the grace period contract relative to those on the regular contract."
Peer Monitoring Risk Constraint
"Fischer (2013) identifies peer monitoring as an alternative reason for low risk-taking by microfinance clients."
Debt Maturity Portfolio Effect vs Income Effect
"Using a return to capital of r_L = 0.08, even if all returns are reinvested, the endline capital stock differential will be Rs 10,000, which is roughly half of the difference observed in the data... lead us to emphasize the portfolio effect."
Microenterprise Product and Inventory Diversification
"Relative to regular clients, they were more likely to extend credit to customers through loans and pre-orders and to offer a wider array of goods and services."
Targeted Microfinance Risk Subsidies
"A subsidy of Rs 150 per client would make the MFI indifferent between only offering the regular contract and offering both the regular and grace period contracts at the baseline 17.5 percent interest rate... the implied social rate is a return of 178 percent per year."
Risk-Aversion Heterogeneous Treatment Effects
"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."
Subsidized Flexible Small Business Debt
"One such example are Small Business Administration loans in the United States which are subsidized, have relatively flexible contract terms, and default rates between 13–15 percent (compared to 2–5 percent on typical MFI loans)..."
Underinvestment via Contract Design
"Thus, consistent with a large literature on asymmetric information in credit markets, it appears that the contract that maximizes MFI profits also creates inefficiencies via underinvestment."
Willingness to Pay for Debt Flexibility
"Forty percent of clients are willing to pay an interest rate of 17.5 percent or higher for the grace period (no client is willing to pay more than 59 percent)."