Demand for commitment in credit and saving contracts: a field experiment

Abstract

We conduct a field experiment in which we offer credit and saving contracts to the same pool of Pakistani microfinance clients. Additional treatments test ex ante demand for soft commitment (in the form of reminders, either to respondents or to their families), hard commitment (in the form of a penalty for missing an instalment), and flexibility (an option to postpone an instalment) to save or pay loan instalments on time. We find substantial demand for fixed-repayment contracts in both the credit and savings domains, in ways that imply that respondents value the commitment required. While we find little or no average demand for additional contractual features, we nonetheless observe that different combinations of contractual add-ons are preferred depending on the respondent’s level of financial discipline. Respondents with high financial discipline prefer flexibility in credit contracts when combined with reminders to self while those with low discipline value penalties in savings contracts only when paired with reminders. Our results imply that, for the average microfinance client, demand for commitment is met through the regular payment schedule built into standard microcredit or commitment savings contracts. However, combining penalties or flexibility with reminders may appeal to certain subsets of clients.