Microcredit Contracts Risk Diversification And Loan Take-Up

We examine theoretically and empirically the demand for microcredit beneath totally different legal responsibility arrangements and risk environments. A theoretical model exhibits that the demand for joint-liability loans can exceed that for particular person-legal responsibility loans when danger-averse borrowers worth their lengthy-time period relationship with the lender. Joint legal responsibility then presents a option to diversify danger and cut back the possibility of shedding access to future loans. We additionally present that the demand for loans relies upon negatively on the riskiness of projects. Using knowledge from a randomised controlled trial in Mongolia we find that these mannequin predictions hold true empirically. In particular, we use modern data on subjective risk perceptions to point out that anticipated challenge danger negatively affects the demand for loans. In step with an insurance role of joint-legal responsibility contracts, this impact is muted in villages where joint-liability loans can be found.

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