Debt Traps? Market Vendors and Moneylender Debt in India and the Philippines (WP-18-05)
Dean Karlan, Sendhil Mullainathan, Benjamin Roth
A debt trap occurs when someone takes on a high-interest rate loan and is barely able to pay back the interest, and thus perpetually finds themselves in debt (often by re-financing). Studying such practices is important for understanding financial decision-making of households in dire circumstances, and also for setting appropriate consumer protection policies. The researchers conduct a simple experiment in three sites in which they paid off high-interest moneylender debt of individuals. Most borrowers returned to debt within six weeks. One to two years after intervention, treatment individuals were borrowing at the same rate as control households.
Find more Global Poverty Research Lab working papers on SSRN.