DP12666 | Debt Traps? Market Vendors and Moneylender Debt in India and the Philippines

Publication Date

01/30/2018

JEL Code(s)

Keyword(s)

Programme Area(s)

Network(s)

Abstract

A debt trap occurs when someone takes on a high-interest rate loan and is barely able to pay back the interest, and thus perpetually finds themselves in debt (often by re-financing). Studying such practices is important for understanding financial decision-making of households in dire circumstances, and also for setting appropriate consumer protection policies. We conduct a simple experiment in three sites in which we paid off high-interest moneylender debt of individuals. Most borrowers returned to debt within six weeks. One to two years after intervention, treatment individuals were borrowing at the same rate as control households.