Beiträge zur Jahrestagung des Vereins für Socialpolitik 2016: Demographischer Wandel - Session: Development and Industrial Organization A13-V2
Does microcredit create overindebtedness? We model the (over-)borrowing behavior of low-income households under uncertainty and limited liability, revealing several potential factors in overindebtedness risk. Based on a household panel survey in urban Uganda, we then compare various indicators of overindebtedness across borrower types, including a `financial distress score' that is a refinement of a measure based on loan-related `sacrifices' made by borrowers recently used in the literature. Formal microcredit clients experience less financial distress than informal borrowers (a substitution effect), but they experience more distress and have lower food consumption when compared to applicants for formal loans (a scale effect). The estimates are lower bounds on the true effects under no selection on unobservables, and hold true too for long-term borrowing. These findings raise questions regarding externalities from (super-optimal) levels of competition in the urban Ugandan credit market, and underscore the importance of institutions (such as saving and insurance) to deal more effectively (than microcredit) with shocks.