INTEREST RATES IN GROUP LENDING: A BEHAVIOURAL INVESTIGATION

Klaus Abbink, Bernd Irlenbusch () and Elke Renner

Pacific Economic Review, 2006, vol. 11, issue 2, 185-199

Abstract: Abstract. Microfinance institutions (MFIs) serve more than 5 million households in developing countries. A crucial variable for MFI schemes is the interest rate to be charged from borrowers. This paper studies the behavioural impacts of the repayment burden on repayment performance. In a laboratory experiment, we vary the amount a borrower group has to repay and study how this affects free‐riding behaviour. We can identify two counteracting effects: a higher repayment burden intensifies the incentives to free‐ride as shirking saves more money. On the other hand, high‐interest loans are less tolerant towards defaulters, which exerts a disciplining effect.

Date: 2006
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