DP11549 | Financing Smallholder Agriculture: An Experiment wth Agent-Intermediated Microloans in India

Publication Date

09/30/2016

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Abstract

Recent evaluations have found that traditional microloans have insigni ficant impacts on incomes and output. Randomly selected villages in West Bengal, India participated in a field experiment with a novel variant of microcredit called TRAIL, where the selection of borrowers of individual liability loans was delegated to local trader-lender agents incentivized by repayment-based commissions. Other randomly selected villages participated in a group-based microcredit program called GBL. TRAIL loans increased the production of the leading cash crop and farm incomes by 27-37%, but GBL loans had insigni ficant e ffects. To understand underlying mechanisms, we develop and test a theoretical model that explains borrower selection into the two schemes as well as borrower incentives to invest the loans for productive purposes. We fi nd that borrowers selected by the TRAIL agents were more able farmers than those who self-selected into the GBL scheme; this pattern of selection explains about a third of the observed di fference in income impacts.