Like magic: Reducing consumer credit risk with non-pecuniary incentives
On 16 December 2025 at 4:15 p.m., the Finance Center Münster invites you to a guest lecture by Prof. Dr. Lars Norden from the Brazilian School of Economics and Finance (EPGE).
Incentives can facilitate consumer credit that might otherwise be unavailable. We examine a quasi-natural experiment in Brazil, where a lender offers standard and incentive credit contracts. The incentive contracts carry lower interest rates and must be repaid through the electricity bill or borrowers face electricity cutoffs. Using data on loan applications and rejections, we test model-based hypotheses. We find, at origination, incentive borrowers are riskier, with 30% lower credit scores than standard borrowers. However, after origination, incentive borrowers become “like magic” safer, with 20% lower default rates than standard borrowers. Over time, the lender shifts from standard to incentive contracts.