DP9503 Long-Run Price Elasticities of Demand for Credit: Evidence from a Countrywide Field Experiment in Mexico

Author(s): Dean S. Karlan, Jonathan Zinman
Publication Date: June 2013
Keyword(s): interest rate elasticities, interest rate policy, interest rates, microcredit
JEL(s): E43, G21, O11, O12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9503

The long-run price elasticity of demand for credit is a key parameter for intertemporal modeling, policy levers, and lending practice. We use randomized interest rates, offered across 80 regions by Mexico?s largest microlender, to identify a 29-month dollars-borrowed elasticity of -1.9. This elasticity increases from -1.1 in year one to -2.9 in year three. The number of borrowers is also elastic. Credit bureau data does not show evidence of crowd-out. Competitors do not respond by reducing rates, perhaps because Compartamos? profits are unchanged. The results are consistent with multiple equilibria in loan pricing.