Repayment Frequency in Micro nance Contracts with Present-Biased Borrowers

This paper analyzes the theoretical underpinnings of high-frequency repayment, a featurein nearly all microfi…nance contracts that has been largely overlooked by theorists. The pervasive belief among practitioners that frequent repayment is critical in achieving high repaymentrates is puzzling. Classically rational individuals should bene…fit from more flexible repaymentschedules, and less frequent repayment should increase neither default nor delinquency. Thispaper proposes a simple explanation based on present bias. For such individuals, more frequentrepayment can increase the maximum incentive compatible loan size. However, the welfare effects are ambiguous. More frequent repayment can lead to over-borrowing, reducing welfare asit increases loan sizes.