Debt traps

Principal Researchers: Prof. Sendhil Mullainathan (Harvard) and Dean Karlan (Yale)

This study seeks to understand why some micro-entrepreneurs frequently use high interest debts to finance their business without any expansion in their scale of operation. A significant portion of their profits is spent on servicing debt. It appears that they could considerably increase their long-term income by using savings from prior earnings for working capital. This study seeks to understand the reason for their current behavior and identify the interventions that would relieve them of high-interest indebtedness. The sample population consists of small-scale fruit/vegetable/flower vendors in Chennai who borrow regularly for working capital and face huge fluctuations in income as a result of the perishable nature of the goods they sell. The study will use a randomized design: after a baseline survey, a treatment group, randomly selected among potential beneficiaries, will be offered financial training, or a grant for working capital, or a combination of the two. These treatment groups will be compared to a control group. An end survey will be administered to analyze how the financial behavior of the beneficiaries who received intervention changes and how effective these interventions are in bringing them out of debt.

CMF Research Associate: Veena Jayaram

See some related CMF documents:
# 2008 Project Presentation: Psychology of Debt [PDF, 76.3KB]
# Project description presentation [PDF, 88KB]
# A draft report [PDF, 52.1KB]