Temptation Goods Consumption: Is There Moral Hazard in the Provision of Household Microcredit in Indonesia?

Microcredit has become a significant element in development strategies (Islam 2015), but microcredit has not always had a positive impact on the welfare of the borrowers. In many cases the recipients do not use the loans in accordance with the designation. One example of inappropriate use of microcredit loans is in the form of consumption of temptation goods. Using data from Indonesia Family Live Surveys 5 (IFLS 5) in 2014, this study aims to analyze the impact of microcredit loans on households' temptation goods expenditure. Using linear regressions and propensity score matching (PSM), our empirical results show that there were differences in expenditure on temptation goods between recipients and non-recipients of microcredit. Microcredit recipients' weekly real expenditure on temptation goods is around 39,000 rupiahs (3 US dollar) higher compared to non-recipients, or equivalent to around 2 million rupiahs (146 US dollar) a year. Despite the impact on real expenditure, we found no evidence that microcredit affects the proportion of expenditure on temptation goods with respect to total household expenditure. In addition, the proportion of expenditure on temptation goods is decreasing with a higher degree of risk aversion.