Give Me a Pass: Flexible Credit for Entrepreneurs in Colombia
Working Paper 30634
DOI 10.3386/w30634
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Although microcredit has reached millions, recent randomized evaluations find limited average business impacts. Contract rigidity, specifically the fixed and frequent installments, may limit productive risk-taking and thus diminish impact on average profits but risk triggering moral hazard. We test this with a Colombian lender that experimentally compared, for a sample of new borrowers, rigid lending to a loan product that included three “passes” to push off a monthly payment to the future. The flexible loan did lead to some shifts in investment behavior but no average impact on revenue or profits level or variance, and did lead to higher default.