This paper reports a study on decision-making by borrowers regarding
take-up of different loan types in a laboratory microfinance experiment.
I show that when prospective borrowers are offered a flexible choice of
different loan types (here, individual liability (IL) and joint
liability (JL)), take-up increases. This is due to heterogeneous
borrowers self-selecting into different loan types. Results suggest that
more risk averse borrowers are less willing to take up IL loan and less
selfish borrowers show signs of higher inclination to take up JL loan.
The results collectively imply that microloan offers need to be
customized according to the heterogeneous preferences of borrowers;
also, there needs to be enough flexibility in the offered choice-set for
better self-selection. This would result in a substantial increase in
the take-up rate of microloans by the borrowers.