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

Author(s): Dean S. Karlan, Sendhil Mullainathan, Benjamin Roth
Publication Date: January 2018
Date Revised: June 2018
Keyword(s): debt, household finance, moneylender
JEL(s): D12, D91, O12
Programme Areas: Financial Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12666

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.