Behavioral Foundations of Microcredit:Experimental and Survey Evidence from Rural India

Microcredit is an innovative financial tool designed to reduce poverty and fix credit marketimperfections. We use experimental measures of time discounting and risk aversion forvillagers in south India to highlight behavioral features of microcredit. Conditional onborrowing from any source, women with present-biased preferences are more likely thanothers to borrow through microcredit institutions. Microcredit contracts require loanrepayments in regular, fixed installments and they harness peer pressure to encouragediscipline. These innovations mirror mechanisms highlighted in behavioral approaches tosaving, suggesting that microcredit’s popularity stems partly from modes of encouragementand self-discipline absent in typical lending mechanisms....