Do Risky Microfinance Borrowers Really Invest in Risky Projects? Experimental Evidence from Bolivia

Eliana Zeballos, Alessandra Cassar and Bruce Wydick

Journal of Development Studies, 2014, vol. 50, issue 2, 276-287

Abstract: This paper reports the results of an experiment testing 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. Instead, our results support more recent behavioural theories of credit market failure. Implications are that defaulting microfinance borrowers may be those who take too little investment risk rather than those who take too much.

Date: 2014
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DOI: 10.1080/00220388.2013.858124

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