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Implicit and Explicit Commitment in Credit and Saving Contracts: A Field Experiment

Author

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  • Uzma Afzal
  • Giovanna D'Adda
  • Marcel Fafchamps
  • Simon R. Quinn
  • Farah Said
Abstract
We conduct a field experiment to test the demand for flexibility and for soft and hard commitment among clients of a microfinance institution. We offer a commitment contract inspired by the rotating structure of a ROSCA. Additional treatments test ex ante demand for soft commitment (in the form of reminders), hard commitment (in the form of a penalty for missing an installment), and flexibility (an option to postpone an installment). Our design is unique in the literature for allowing us to test — using the same respondent population — how demand for explicit commitment features differs between loan and savings contracts. We find substantial demand for both credit and savings contracts but no demand for additional commitment features — either in isolation or in combination — in spite of their effectiveness in improving repayment. In particular, demand for savings is insensitive to explicit commitment features. Individuals offered loans actively dislike commitment and flexibility, unless the latter is combined with reminders. These findings complement a literature showing that commitment devices induce financial discipline. They show that demand for commitment depends on whether commitment features are implicit or explicit.

Suggested Citation

  • Uzma Afzal & Giovanna D'Adda & Marcel Fafchamps & Simon R. Quinn & Farah Said, 2019. "Implicit and Explicit Commitment in Credit and Saving Contracts: A Field Experiment," NBER Working Papers 25802, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25802
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    Cited by:

    1. Geng, Xin & Janssens, Wendy & Kramer, Berber, 2023. "Liquid milk: Savings, insurance and side-selling in cooperatives," Journal of Development Economics, Elsevier, vol. 165(C).
    2. Augsburg, Britta & Caeyers, Bet & Giunti, Sara & Malde, Bansi & Smets, Susanna, 2023. "Labeled loans and human capital investments," Journal of Development Economics, Elsevier, vol. 162(C).
    3. Cátia Batista & Marcel Fafchamps & Pedro C Vicente, 2022. "Keep It Simple: A Field Experiment on Information Sharing among Strangers [Changing Saving and Investment Behavior: The Impact of Financial Literacy Training and Reminders on Micro-Businesses]," The World Bank Economic Review, World Bank, vol. 36(4), pages 857-888.
    4. Hisaki KONO & Abu SHONCHOY & Kazushi TAKAHASHI, 2023. "At the Right Time:Eliminating Mismatch between Cash Flow and Credit Flow in Microcredit," Discussion papers e-22-013, Graduate School of Economics , Kyoto University.
    5. Vihriälä, Erkki, 2023. "Self-imposed liquidity constraints via voluntary debt repayment," Journal of Financial Economics, Elsevier, vol. 150(2).
    6. d'Adda, Giovanna & Mahmud, Mahreen & Said, Farah & Bonan, Jacopo, 2020. "The Role of Flexibility and Planning in Repayment Discipline: Evidence from a Field Experiment on Pay-as-You-Go Off-Grid Electricity," RFF Working Paper Series 20-14, Resources for the Future.

    More about this item

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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