Liquidity defaults and progressive lending in microfinance: A lab‐in‐the field experiment in Bolivia

Many microfinance institutions (MFIs) use dynamic incentives in combination with progressive lending schemes to reduce defaults. However, the specific role of has never been tested empirically, while observational evidence other contexts points potentially adverse effects. Using an experimental approach, we study impact on overborrowing, attending possibility that may actually increase liquidity We organize a framed field experiment municipality Coroico, Bolivia, inviting 271 members MFI participate game. In penetration rates are among highest world, systems common practice, and concept practices well known most people. find participants who borrowed over multiple rounds progressively increasing borrowing caps showed increased defaults once became unconstraining compared those without lending. speculate this result stems from anchoring loan requests credit limit set by lender formalize rationale model for demand naive borrowers. MFIs should consider potential perverse effects when designing policies aimed at reducing overborrowing.