Discussion paper

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

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.

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Citation

Karlan, D, S Mullainathan and B Roth (2018), ‘DP12666 Debt Traps? Market Vendors and Moneylender Debt in India and the Philippines‘, CEPR Discussion Paper No. 12666. CEPR Press, Paris & London. https://cepr.org/publications/dp12666