The Psychology of Borrowing: Evidence from Kenyan Dairy Farmers

Access to credit can be an important part of the economic development process: credit allows financially constrained firms to make productive investments and increase their output. Microfinance has been proposed as a vehicle for economic growth, yet recent evidence has shown that microfinance has not achieved the transformative effects that were initially hypothesized. Using a series of field experiments, we explore whether principles from psychology and economics can be employed to improve lending models for smallholder dairy farmers in Kenya. The first experiment studies the borrower side of the problem, focusing on how the endowment effect interacts with collateral requirements to influence demand for loans. The second experiment examines the lender side, exploring how to optimize financial contracts to increase take-up while managing default risk.

 

 

 

 

Kevin Carney is an Assistant Professor at the University of Michigan’s Department of Economics, studying development and behavioral economics. His research uses field experiments to answer policy questions in developing countries, spanning a broad range of topics including household finance, health economics, and political economy. Kevin received a Ph.D. in public policy from Harvard University and was a postdoctoral fellow at the University of Chicago.