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Unpublished Paper
Why Risk It? The Effect of Risk and Time Preferences on Microfinance Loan Default
  • Nike Start, University of San Francisco

Microfinance is widely recognized as a powerful method for poverty alleviation. However, little is known about the characteristics of those who default on their loans. Understanding the behavior of borrowers is an important component of mitigating adverse selection and the moral hazard of lending. Both of these concepts embody some of the greatest challenges faced by microfinance institutions, and they provide the major motivation for this study. Accordingly, the main objective of this research is to investigate whether non-delinquent borrowers and delinquent borrowers of a microfinance institution reveal any difference in their level of risk preference and time preference. This is tested through an artefactual field experiment with 97 borrowers from the National Microfinance Bank of the Hashemite Kingdom of Jordan. In the experiment, participants chose between six choices that measure their level of risk preference. In addition, participants selected a voucher that varies both in time and in value to capture their time preference levels. The results reveal that non-delinquent borrowers are more likely to be risk-seeking and impatient individuals when compared to delinquent borrowers, contradicting current literature on risk preference and time preference.

  • Risk-Aversion,
  • Time Preference,
  • Microfinance,
  • Experimental Economics
Publication Date
Spring May, 2013
Citation Information
Nike Start. "Why Risk It? The Effect of Risk and Time Preferences on Microfinance Loan Default" (2013)
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