equality of means in column 8 show only one difference out of 9 (number of no-extension passes used) is statistically significant at the 5% level.

We conclude that there is no evidence of substantial differential selection on unobservables, at least in pass use. Below we will show similar null results for default rates. We thus pool across initial offers and focus henceforth on the effect of the contract, comparing borrowers of the standard loan and flexible loan (irrespective of the initial offer).

This lack of selection refutes the idea that there are many profitable entrepreneurs who reject the standard loan but would accept the flexible loan.<sup>8</sup> This result contrasts, however, with the finding of Barboni and Agarwal (2023) that individuals who accept a flexible loan are more financially sophisticated and have considerably more income volatility. Why is there no selection in our case? Data from the lender phone survey of clients indicate that lack of information cannot be an explanation. Panel A of Appendix Table 7 reports almost all flexible credit clients (98%) understood the use of passes. Unlike Barboni and Agarwal (2023) that required a month-long lag between communication and actual use of the pass, our lender’s passes could be used immediately and thus borrowers maybe were more subject to temptation or procrastination in repaying the loan. In addition, unlike most other studies that introduce flexibility, our sample consisted exclusively of new clients who were perhaps less financially disciplined or had on average weaker internalized repayment norms (both because they have not had as much experience learning to repay loans, and because the lending process has not yet filtered out borrowers who are predilected to default).

In addition, the limited use of passes at the start of the loan is not consistent with the idea that flexible credit clients want to use the product to make larger initial investments. Instead, clients might be reacting to business opportunities as they arise or to unexpected negative shocks to business or household finances.

Appendix Figure 2 shows pass use over time. Since not all loans have the same duration, we graph pass use against the proportion of time elapsed in the loan instead of the number of months elapsed. Pass use is lowest on average in the very first months of the loan’s duration, increasing until about a quarter of the loan’s duration when it reaches its highest point. While anecdotal evidence suggests that some loan officers may have advised clients not to use passes early on, perhaps because of the lower skipped amount

> 8 One could argue that no selection effects would be detected if the sample excluded applicants interested in the flexible loan but not the standard loan, that is, it only included applicants interested in the standard loan, and if takeup conditional on initial interest was only determined by borrower eligibility (leaving no room for increased demand for the flexible credit). While part of our sample is recruited from branch visits (19% of initial flexible credit applications were made during branch visits) and from financial events (25% of initial applications), where perhaps prospective borrowers approached the lender only knowing about the standard loan, we still find no selection effects when we focus on the sample recruited during door-to-door promotions for which no loan information was provided before revealing the randomized offer type (see Appendix Table 8). In addition, overall take-up conditional on initial interest was only 28% and only about a third of initial applications were rejected because of a negative credit assessment, leaving plenty of room for take-up effects due to the flexibility features.