Give Me a Pass: Flexible Credit for Entrepreneurs in Colombia (WP-22-52)
Lasse Brune, Xavier Giné, and Dean KarlanMicrocredit promised business growth for small firms lacking access to banking loans. Yet while reaching millions, recent randomized evaluations suggest limited average business impacts. Critics often blame contract rigidity, specifically the fixed and frequent installments, for the lack of productive risk-taking. But such rigidity may instill borrower discipline. The researchers partnered with a Colombian lender that offered first-time borrowers a flexible loan that permitted delaying up to three monthly repayments. They find null effects for revenue and profits but increases in loan defaults. The evidence thus aligns with established microlender practice of offering rigid contracts to first-time borrowers.