Written by Michael Bauer, Julie Chytilová, and Jonathan Morduch, published by the Financial Access Initiative in December 2009, 47 pages, available at: http://financialaccess.org/sites/default/files/Behavioral%20Foundations%20of%20Microcredit%20-%20Bauer%20Chytilova%20Morduch%2012-18-09.pdf
This paper examines behavioral effects of time discounting and risk aversion as they relate to the acquisition of microcredit. Specifically, the authors seek to determine whether people with a “present-bias time inconsistency” exhibit different financial behavior related to borrowing and saving. These are people that show some level of preference for less money sooner as opposed to more money later, particularly when the reward is more immediate. The authors go on to demonstrate how microcredit can help these borrowers overcome the assumed lack of financial “self-discipline” associated with present bias and how microcredit can, in this sense, become a replacement for contractual savings.
The study involves a random sample of 573 villagers in Karnataka, a coastal state in southern India. To determine whether they exhibit “present-bias” and if they are “time-consistent,” participants were first asked if they preferred to receive INR 250, the equivalent of USD 5.34, tomorrow or INR 265, the equivalent of USD 5.66, in three months. Four more similar questions were posed, with the amount to be received in three months increasing up to INR 375, the equivalent of USD 8.02, and the amount to be received tomorrow remaining constant. Individuals that switched their answers more than once were removed from the sample, reducing the total number of participants to 544. Participants were then asked about their preference to receive less money in 12 months, or more money in 15 months time. Individuals were identified to exhibit “time inconsistency” if they chose the earlier but lesser reward any number of times in either survey. And, if an individual preferred the earlier reward more times in the first survey than they preferred the earlier reward in the second survey, this individual is not only time inconsistent but more specifically “present-bias time inconsistent.” These people demonstrated that the immediacy of the reward, even if the reward is less, is especially important to them.
As stated, the main results are focused on these individuals. About one third of the total sample was determined to exhibit this bias. Variables such as level of education, wealth, or seasonality of income were not found to be strong predictors of the likelihood of exhibiting this bias. However, individuals in this “present-bias” group are more likely than all others in the sample to borrow. This is particularly true of women that exhibited a strong present bias. These women are especially likely to borrow from a microcredit institution or self-help group (SHG), as opposed to, say, a bank or moneylender. Additionally, these women were found to hold a comparatively smaller percentage of their savings at home. Furthermore, present bias was not found to be a predictor of repayment discipline, despite the fact that present-bias individuals are often assumed to have less patience with consumption.
These results are consistent with the idea that the structured repayment schedule, peer pressure, and contractual obligations typically associated with microcredit are important to people who may lack financial “self-discipline.” Therefore, the authors believe that, for these people, the goal of microcredit is comparable to the goal of contractual savings, which is “to exchange a steady series of small fixed payments for a substantial amount of income obtainable at a future date.” Additionally, women who have less decision-making power in the household were found to be more likely to have loans from SHGs, indicating that microcredit may be used to protect finances from husbands. With all this considered, the authors believe that microcredit can be viewed as a substitute for contractual savings for present-biased people.
By Christopher Maggio, Research Assistant
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