Author Abstract
A debt trap occurs when someone takes on a high-interest rate loan and is barely able to pay back the interest, thus being perpetually in debt (often by refinancing). Studying such practices is important for understanding financial decision-making of households in dire circumstances as well as for setting appropriate consumer protection policies. We conduct a simple experiment in three sites in which we paid off high-interest moneylender debt of individuals. Most borrowers returned to debt within six weeks. One to two years after intervention, treatment individuals were borrowing at the same rate as control households.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: February 2018
- HBS Working Paper Number: NBER Working Paper Series, No. 24272
- Faculty Unit(s): Entrepreneurial Management