| By: |
Gulesci, Selim;
Madestam, Andreas;
Stryjan, Miri |
| Abstract: |
While adverse selection is an important theoretical explanation for credit
rationing it is difficult to empirically quantify. One reason is that most
studies measure the elasticity of credit demand of existing or previous
borrowers as opposed to the population at large. We circumvent the issue by
surveying a representative sample of microenterprises in urban Uganda and
present evidence of adverse selection in two key dimensions of credit
contracts - interest rates and collateral requirements. Theory suggests that a
lower interest rate or a lower collateral obligation should increase take up
among less risky borrowers. Using hypothetical loan demand questions, we test
these predictions by examining if firm owners respond to changes in the
interest rate or the collateral requirement and whether take up varies by
firms' risk type. We find that contracts with lower interest rates or lower
collateral obligations increase hypothetical demand, especially for less risky
firms. The effects are particularly strong among manufacturing businesses. Our
results imply that changes to the standard microfinance product may have
substantial effects on credit demand. |
| Keywords: |
Adverse Selection; Collateral; interest rates; Microfinance; SMEs |
| JEL: |
D22 G21 O12 |
| Date: |
2018–02 |
| URL: |
http://d.repec.org/n?u=RePEc:cpr:ceprdp:12742&r=mfd |