Loan Contract Structure and Adverse Selection: Survey Evidence from Uganda
Selim Gulesci (),
Andreas Madestam () and
No 12742, CEPR Discussion Papers from C.E.P.R. Discussion Papers
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. Theory suggests that a lower interest rate or a lower collateral obligation should increase take up among less risky borrowers. We test these 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 that contracts with lower interest rates or lower collateral obligations increase hypothetical demand â?? especially for less risky firms, as theory predicts. Our results imply that changes to the standard loan product available to microenterprises may have substantial effects on credit demand.
Keywords: Adverse Selection; Collateral; interest rates; SMEs (search for similar items in EconPapers)
JEL-codes: D22 G21 O12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cta and nep-mfd
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at firstname.lastname@example.org
Journal Article: Loan contract structure and adverse selection: Survey evidence from Uganda (2020)
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:cpr:ceprdp:12742
Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... rs/dp.php?dpno=12742
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().