Borrower Runs

Philip Bond and Ashok Rai
Additional contact information
Philip Bond: University of Pennsylvania, http://finance.wharton.upenn.edu/
Ashok Rai: Williams College, http://econ.williams.edu

No 2008-07, Center for Development Economics from Department of Economics, Williams College

Abstract: Microfinance institutions and other lenders in developing countries rely on the promise of future loans to induce repayment. However, if borrowers expect that others will default, and so loans will no longer be available in the future, then they will default as well. We refer to such contagion as a borrower run. The optimal lending contract must provide additional repayment incentives to counter this tendency to default.

Pages: 27 pages
Date: 2008-05
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Published in Journal of Development Economics, March 2009, v. 88, iss. 2, pp. 185-91.

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