January 11, 2010
Are microfinance clients who sell contraband less likely to repay?
I was surprised to learn the other day that in Bolivia a huge fraction of the goods purchased with microcredit are smuggled across the Peruvian and Chilean borders in order to avoid customs (for instance, most appliances are smuggled here). Ignoring the morality of it (I don't think the government cares all that much - many retailers who sell contraband pay sales tax), do you think that the behavior of clients who sell contraband is somehow different? Are people who can and do buy illegal products less likely to care about fulfilling their loan commitments?
I'm pretty sure that no IRB would let us randomly give some vendors access to a pipeline of contraband (it would also be hard to partner bank willing to work on a project where we think that repayments would go down), but I still think that it's an interesting question.
To be moral is to pay sales tax?
"Are microfinance clients who sell contraband less likely to repay?"
Just as likely to repay, I'd wager. What a borrower trades in has little to do with whether they repay: repayment doesn't hinge on the morality of the borrower's trading behavior, it's about ensuring continued access to future loan capital. This goes for borrowers who sell smuggled contraband, or who sell counterfeit goods.
Framing taxpaying as a moral duty for the working poor in developing countries is a bit odd too, especially if it's country where the taxpayer is much less likely to enjoy transparent governance and have some confidence that the taxes he or she pays will be honestly put to good use. If the government is perceived as corrupt, why pay taxes? Not sure where the moral buck stops (or starts).
If an American gets a cash advance on his credit card, then goes to spend the money a high-priced prostitute -- channeling Eliot Spitzer here -- because he has used the loan/credit for something purportedly illicit/immoral, but certainly illegal, is he less likely to pay back the charges on his credit card?
That IS interesting. What if
That IS interesting. What if we did the opposite: instead of inducing more illegal activity, randomly implement a screening process to weed out those with illegal business activities? If, as you say, many current microfinance clients purchase smuggled goods, would it be possible to give credit officers different sets of approval criteria for loans, which differentially reject those people, or is it too subjective/hard to identify people with illegal activities? Also, I suppose this would still call attention to the fact that the banks existing procedures accommodate smuggling..
Fake bags and cheating
This is indeed a really interesting question. It reminds me of the finding that people who buy fake merchandise (counterfeit Louis Vuitton bags, "Chanel" sunglasses, etc.) are also more likely to cheat in other life situations.
Hat tip to Marginal Revolution, which gives us Dan Ariely talking about an experiment he ran where he randomly induced people to use "fake" merchandise, and then found that they were more likely to cheat afterwards...
Since you mention the limits (errr, illegality) of providing channels to buy contraband, I wonder if we could design an experiment where we randomly make salient the issue of contraband, and see if it affects repayment behavior...