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Topics in microfinance and behavioural economics

Sinn, Miriam (2012) Topics in microfinance and behavioural economics. PhD thesis, London School of Economics and Political Science.

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This thesis contributes to economic research in microfinance and behavioural economics and bridges the gap between the two fields. Chapter 2 compares three lending mechanisms used by microfinance organizations: individual lending, simultaneous group lending and sequential group lending. The results are that the optimal choice of lending mechanism depends on the underlying distribution of project returns and on the level of available official contract enforcement. If contract enforcement is weak, sequential group lending unambiguously achieves the highest repayment rate. Hence sequential group lending can operate in settings in which simultaneous group lending and individual lending are not feasible due to weak contract enforcement. Chapter 3 shows that multiple price lists, currently the standard way of eliciting time preferences, will give biased estimates when income is uncertain. This is first shown theoretically and the resulting hypotheses are then tested empirically. The experiment finds that income risk causes participants to make more patient choices when choosing between two payments in the future. When choosing between an immediate and a future payment, however, income risk has no significant effect. As a result, participants with uncertain income appear more present-biased and less future-biased. Finally, only estimates obtained under safe income show a significant correlation with real-world financial outcomes. The fourth chapter shows how several features of the microfinance industry can be explained by projection bias over habit formation. Humans have a tendency to 34 underestimate to what extent their future preferences will differ from their current preferences and this systematic bias is known as projection bias. With the help of a formal model, this paper demonstrates that the prevalence of flat interest rate calculations, the high frequency of repayments, and the problem of over-investment can all be explained by this particular bias. Importantly, the policy implications resulting from this theory differ from those of other prevailing models, such as hyperbolic discounting.

Item Type: Thesis (PhD)
Additional Information: © 2012 Miriam Sinn
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Departments > Economics
Supervisor: Ghatak, Maitreesh

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