(Joint with William Jack, Michael Kremer and Tavneet Suri)

Recent studies suggest that many small businesses in the developing world have high unrealized returns to capital. One view is that owners are credit constrained and that joint liability credit offers can relieve these constraints and thus realize these returns. A randomized trial among dairy farmers in Kenya suggests that willingness to borrow to invest in a productive asset (water tanks) is highly sensitive to deposit and guarantor requirements. Substitution of joint liability guarantor requirements for deposit requirements does not increase loan take up. Giving farmers the opportunity to collateralize loans with the asset they purchase dramatically increases loan take up. In our sample, selection and incentive effects on default and late payments are minimal. Many borrowers repay loans early.  The data are consistent with the hypothesis that farmers are loss averse and that asset-backed collateralization encourages investment by loss-averse agents. Further work would be needed to ascertain the profitability of such contracts beyond our sample. We find that children in households offered loans on less restrictive terms spend less time fetching water and tending livestock and that girls are more likely to be enrolled in school.