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Microcredit Contracts, Risk Diversification and Loan Take-Up

Attanasio, O; Augsburg, B; De Haas, R; (2019) Microcredit Contracts, Risk Diversification and Loan Take-Up. Journal of the European Economic Association , 17 (6) pp. 1797-1842. 10.1093/jeea/jvy032. Green open access

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Abstract

We study theoretically and empirically the demand for microcredit under different liability arrangements and risk environments. A theoretical model shows that the demand for joint-liability loans can exceed that for individual-liability loans when risk-averse borrowers value their long-term relationship with the lender. Joint liability then offers a way to diversify risk and reduce the chance of losing access to future loans. We also show that the demand for loans depends negatively on the riskiness of projects. Using data from a randomised controlled trial in Mongolia we find that these model predictions hold true empirically. In particular, we use innovative data on subjective risk perceptions to show that expected project risk negatively affects the demand for loans. In line with an insurance role of joint-liability contracts, this effect is muted in villages where joint-liability loans are available.

Type: Article
Title: Microcredit Contracts, Risk Diversification and Loan Take-Up
Open access status: An open access version is available from UCL Discovery
DOI: 10.1093/jeea/jvy032
Publisher version: https://doi.org/10.1093/jeea/jvy032
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10092666
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