Oct 27, 2011

Paper of the day: Grace-period in Micro-loans

From the paper: Debt Structure, Entrepreneurship, and Risk: Evidence from Microfinance, by Erica Field, Rohini Pande, John Papp, and Natalia Rigol
Abstract: This paper examines whether and how repayment structure of a debt contract influences entrepreneurship. Using a field experiment, we contrast the classic microfinance contract which requires repayment begin immediately after loan disbursement with a contract that includes a two-month grace-period. The shift to a grace-period contract increased short-run business investments and long-run profits. Alongside, variance of profits and default rates increase. These findings suggest that liquidity constraints imposed by debt structure inhibit investment in high-return but illiquid investment opportunities. Debt contracts that require early repayment discourage risky investments but limit the potential impact of microfinance on entrepreneurship and household poverty.


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