Use dynamic incentives to prevent strategic default

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Reference no: EM132000275

Every year at of plating time, a poor farmer in a village in Afghanistan needs a loan of AFN 7000. If funded at harvest time he will end up with a yield of crops worth AFN 20000 that is just enough to cover his consumption needs. If his annual discount rate is ½ for next year and zero beyond that, how can an MFI use dynamic incentives to prevent strategic default? What is the maximum interest rate the MFI can charge?

Reference no: EM132000275

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