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BEPP Applied Economics Workshop: Stacy Carlson (MIT)

  • 265 JMHH Philadelphia, PA 19104 (map)

When: Thu, January 18, 12:00pm – 1:30pm

Where: 265 JMHH (map)

Speaker: Stacy Carlson

Dynamic Incentives in Credit Markets: An Exploration of Repayment Decisions on Digital Credit in Africa

ABSTRACT: Many lenders operating in unsecured credit markets utilize dynamic incentives, whereby incentives to repay are generated by promising access to future loans. In this project, I explore the impact of dynamic incentive schemes on borrower behavior in the digital credit market. To do so, I analyze unique data from a digital lender in Africa who relies heavily on dynamic incentives to encourage repayment. I use a series of quasi-experiments induced by policy nonlinearities to estimate the effect of progressive lending policies on borrower repayment decisions. I find that new borrowers who receive a larger initial loan are more likely to default on that loan, consistent with positive moral hazard and repayment burden effects. By contrast, repeat borrowers who receive a larger loan (relative to their previous loan) are actually less likely to default. I provide evidence that this reflects a strategic repayment motive, whereby borrowers repay in order to get access to larger loans in the future. I then write down and estimate a dynamic structural model consistent with my empirical results. I use the estimation results to simulate the profit-maximizing dynamic lending scheme for the lender in this setting.