Selection and Incentives in Microequity Contracts: Evidence from a Field Experiment

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Firms often cite financing constraints as key barriers, yet lenders rarely innovate beyond debt products. While theory suggests debt may dominate equity due to adverse selection and moral hazard, these mechanisms are difficult to isolate empirically. We design and test a microequity product with Egyptian livestock farmers, providing animals and splitting sales proceeds at a fixed rate. We market this product alongside a flexible debt contract. Using a two-stage RCT, we disentangle selection from contract effects. We find strong demand for equity, with many participants willing to accept lower financing probability to avoid debt. These "equity-only" participants exhibit advantageous selection on some key contract performance metrics relative to those willing to accept either contract. However, holding selection fixed, equity causes a drop in net revenue relative to debt—evidence of moral hazard. A set of currency devaluations eliminated this negative effect, demonstrating that moral hazard varies with context. Our findings suggest microequity can enhance financial inclusion by attracting new clients, but managing moral hazard remains a primary, context-dependent challenge.