Document Type

Article

Publication Date

2014

Abstract

This paper reports the results of an experiment designed to test a fundamental assumption in Stiglitz and Weiss (1981) model of credit rationing, that defaulting borrowers are associated with investment in risky projects. Through an artefactual field experiment with 200 Bolivian microfinance borrowers, we observe that subjects from real-world delinquent borrowing groups do not prefer risky projects to safer ones significantly more than subjects from repaying groups. Moreover, when faced with the choice between two options framed as consumption or a relatively safe investment project, risky borrowers significantly opt more for consumption, supporting more recent behavioral theories of credit market failure. This result has important implications for our understanding of microfinance in developing countries: defaulting microfinance borrowers may be those that take too little investment risk rather than those who take too much.

Comments

This is an Accepted Manuscript of an article published by Taylor & Francis in The Journal of Development Studies on 07 Dec 2013, available online: http://dx.doi.org/10.1080/00220388.2013.858124

Presented by Zeballos at the Pacific Conference for Development Economics, March 13, 2010, University of Southern California.

DOI

10.1080/00220388.2013.858124

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