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Brown bag Seminar | Repayment flexibility and risk taking: Experimental evidence from credit contracts

Starting or expanding a business often entails undertaking costly and risky investments. In developing countries, where credit and insurance markets are imperfect, entrepreneurs face constraints on both fronts. If business growth requires access to capital and insurance against entrepreneurial risk - how should the ideal financial contract cater to both of these constraints? Andreas Madestam will answer this question and share his insights in the upcoming brown bag seminar at SITE.

Stockholm Institute of Transition Economics cordially invites you to join the brown bag seminar `Repayment Flexibility and Risk Taking: Experimental Evidence from Credit Contracts´ with Andreas Madestam.

Interested to join the seminar? Please contact site@hhs.se - the link will be sent to you by email with further instructions!

Andreas Madestam is an Assistant Professor in the Department of Economics at Stockholm University. Previously at Bocconi University in Milan. PhD in economics from Stockholm School of Economics. Affiliate of Association of Swedish Development Economists, European Development Research Network, and Theoretical Research in Development Economics.

Research interests include economic development and political economics.

Learn more about Andreas Madestam, here.

Abstract

A widely-held view is that small firms in developing countries are prevented from making profitable investments by lack of access to credit and insurance markets. One solution is to provide repayment flexibility in credit contracts. Repayment flexibility eases both the credit constraint, as it allows for increased spending during the startup phase, and offers insurance, in case of fluctuations in income. In a field experiment among microcredit borrowers in Bangladesh, we randomly assign the option to delay up to 2 monthly repayments at any point during a 12-month loan cycle. The flexible contract leads to substantial (0.2 standard deviation) improvements in business outcomes and socioeconomic status, combined with lower default rates. The results are driven by an increase in entrepreneurial risk taking, implying that the primary mechanism is insurance provision. Repayment flexibility also attracts less risk-averse borrowers interested in business expansion. Our findings suggest that lack of insurance is an important constraint for small firms but that a simple financial product that increases repayment flexibility can be an effective tool for enabling enterprise growth.

Keywords: Repayment flexibility, Insurance, Credit, Microfinance, Entrepreneurship

SITE Entrepreneurship Brown bag

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