Loan contract structure and adverse selection: Survey evidence from Uganda
Selim Gulesci (),
Andreas Madestam () and
Journal of Economic Behavior & Organization, 2020, vol. 172, issue C, 180-195
While adverse selection is an important theoretical explanation for credit rationing it is difficult to quantify empirically. Many studies measure the elasticity of credit demand of existing or previous borrowers as opposed to the population at large; other studies use cross-sectional approaches that may confound borrower risk with other factors. We circumvent both issues by surveying a representative sample of microenterprises in urban Uganda and by measuring their responses to multiple hypothetical contract offers, varying in interest rates and collateral requirements. The two seminal theories on selection provide contradicting predictions following a change in the contractual terms. Under adverse selection, a lower interest rate or a lower collateral obligation should increase take up among less risky borrowers. By contrast, advantageous selection implies that take up should increase among the riskier borrowers. We test these two predictions by examining if firm owners respond to changes in the interest rate or the collateral requirement and whether higher take up varies by firms’ risk type. We find support for the presence of adverse selection as contracts with lower interest rates or lower collateral obligations increase hypothetical demand – especially for less risky firms. Our results imply that changes to the standard loan product available to microenterprises may have substantial effects on credit demand.
Keywords: Adverse selection; Interest rates; Collateral; SMEs (search for similar items in EconPapers)
JEL-codes: D22 G21 O12 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Working Paper: Loan Contract Structure and Adverse Selection: Survey Evidence from Uganda (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:172:y:2020:i:c:p:180-195
Access Statistics for this article
Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.
More articles in Journal of Economic Behavior & Organization from Elsevier
Bibliographic data for series maintained by Catherine Liu ().