The argument for microlending is “access to credit allows people to invest in themselves and their business, but the cost for interacting with people on the $100 level is such that it eats any profit, making banks uninterested.” Thus, the service can be run primarily as a nonprofit, or by offloading some of the administrative work and risk to the borrowers (i.e. the lending circle idea).
I was struck by the lopsidedness of the figures.
That’s because the market expected that the net return on the debt would be about 3%. So it might look like you’re saving people from $80,000 of heartache, but you’re only actually increasing their financial prospects by about the $2,300 you transferred to them. Yes, they don’t get called by debt collectors, and yes, they don’t go bankrupt- but artificially inflating someone else’s creditworthiness is a problem for them and everyone else. It doesn’t seem like you could get more than $2,300 out of them long-run, because otherwise the debt collection companies would be able to get more out of them!
But the thing about personal debt is that, thanks to interest payments and stress, it prevents people with high earning potential (compared to an average African) from making decisions that would optimal were they debt-free—like finishing college or buying a used car so they can take on a higher-paying job.
When helping people to get out of their problems, there is always a risk of perverse incentives. (Should I take a lot of debt, hide the money, and contact the debt-buying charity?) Which reasonable steps could decrease the risks?
A policy of helping each person only once in a lifetime. If they take more debt, it’s their problem now.
Selecting the people to be helped randomly. For example, if we are able to help n people, we choose 2n best candidates and then help a randomly chosen half of them. This could discourage the “get into debt, they will help me” scenario. -- Okay, I am not sure about this. A stupid enough person would take the risk, precisely because they are stupid.
Mandatory participation in “elementary rationality” exercises which would teach people to not take more debt. Increases the costs of the program.
Selecting the people to be helped randomly. For example, if we are able to help n people, we choose 2n best candidates and then help a randomly chosen half of them.
If you’re going to randomize the recipients, you should also track them to see what effects the debt forgiveness has.
It doesn’t seem like you could get more than $2,300 out of them long-run, because otherwise the debt collection companies would be able to get more out of them!
The OP seemed to be hypothesizing that the mere fact of being in (so much) debt was diminishing productivity; it might be that you can get more than $2300 of value out of them if, say, their being inspired to work for some noble cause (or for higher-status forms of self-interest than debt reduction) makes them work oodles harder or smarter than if they’d been doing analogous work to pay off debts.
It also costs debt collectors some amount of money to collect debt. Presumably, if a business buys debt from a bank, it’s because they think they can collect the debt for a non-trivially lower cost. Otherwise, the bank wouldn’t be willing to sell the debt.
The argument for microlending is “access to credit allows people to invest in themselves and their business, but the cost for interacting with people on the $100 level is such that it eats any profit, making banks uninterested.” Thus, the service can be run primarily as a nonprofit, or by offloading some of the administrative work and risk to the borrowers (i.e. the lending circle idea).
That’s because the market expected that the net return on the debt would be about 3%. So it might look like you’re saving people from $80,000 of heartache, but you’re only actually increasing their financial prospects by about the $2,300 you transferred to them. Yes, they don’t get called by debt collectors, and yes, they don’t go bankrupt- but artificially inflating someone else’s creditworthiness is a problem for them and everyone else. It doesn’t seem like you could get more than $2,300 out of them long-run, because otherwise the debt collection companies would be able to get more out of them!
Or… taking out more debt!
When helping people to get out of their problems, there is always a risk of perverse incentives. (Should I take a lot of debt, hide the money, and contact the debt-buying charity?) Which reasonable steps could decrease the risks?
A policy of helping each person only once in a lifetime. If they take more debt, it’s their problem now.
Selecting the people to be helped randomly. For example, if we are able to help n people, we choose 2n best candidates and then help a randomly chosen half of them. This could discourage the “get into debt, they will help me” scenario. -- Okay, I am not sure about this. A stupid enough person would take the risk, precisely because they are stupid.
Mandatory participation in “elementary rationality” exercises which would teach people to not take more debt. Increases the costs of the program.
Any other ideas?
If you’re going to randomize the recipients, you should also track them to see what effects the debt forgiveness has.
The OP seemed to be hypothesizing that the mere fact of being in (so much) debt was diminishing productivity; it might be that you can get more than $2300 of value out of them if, say, their being inspired to work for some noble cause (or for higher-status forms of self-interest than debt reduction) makes them work oodles harder or smarter than if they’d been doing analogous work to pay off debts.
It also costs debt collectors some amount of money to collect debt. Presumably, if a business buys debt from a bank, it’s because they think they can collect the debt for a non-trivially lower cost. Otherwise, the bank wouldn’t be willing to sell the debt.
I don’t know how significant this is.