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.
Eliana Zeballos, Alessandra Cassar & Bruce Wydick. Do Risky Microfinance Borrowers Really Invest in Risky Projects? Experimental Evidence from Bolivia. The Journal of Development Studies Volume 50, Issue 2, 2014. DOI: 10.1080/00220388.2013.858124