Moral Hazard, Peer Monitoring, and Microcredit: Field Experimental Evidence from Paraguay

Carpenter, Jeffrey P.; Williams, Tyler

doi:10.2139/ssrn.1633930

Cited by 8 publications

(3 citation statements)

References 22 publications

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“…Social and geographical ties make sure borrowers have better information about eachother (Eijkel et al, 2007) and monitor eachother' actions. The banker's moral hazard problem will be solved and repayment defaults will decrease (Carpenter and Williams, 2010a). Hence, information asymmetry plays a big role in current theories about the (rural) financing world, but it has been proven that it is difficult to analyse and assess the impact of informational frictions and streams within groups (Garmaise and Natividad, 2010).…”

Section: Introductionmentioning

confidence: 99%

Information Asymmetry, Group Structure And Repayment: a Study from BRAC Sierra Leone

Zaal¹

2014

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By pulling together survey and experimental data, this research provides new empirical insight into the role of information asymmetry in the process of group structure, the role of risk homogeneity under group lending and their implications for repayment using a unique dataset from rural microfinance members of BRAC in Sierra Leone. Using a series of artificial field experiments (AFE) with microfinance members, games were implemented to determine information asymmetries and risk preferences. Evidence shows indirectly that when microfinance members have more social linkages in their group, which is correlated with the pay-out of the coordination game, that their repayment is better. Direct evidence suggest that when small microfinance groups are more homogeneous in risk, repayment of these microfinance members is also better. This also accounts for the homogeneity in small groups in terms of educational level. When members have the same educational level, repayment is better. These outcomes are consistent with several established theories.

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Section: Introductionmentioning

confidence: 99%

Information Asymmetry, Group Structure And Repayment: a Study from BRAC Sierra Leone

Zaal¹

2014

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“…In Karlan's (2007) study, dropping out of a group with rather than without default makes it 3-6 times as likely that current members report a worsening of friendship, trust and willingness to engage in future sales or purchase transactions. Carpenter and Williams (2010) conduct an experiment among micro borrowers in Paraguay. They find that individuals incur costs of monitoring and sending negative messages in the experiment and that observed repayment problems are less severe in groups whose members are more 'nosy' in the experiment.…”

Section: On the Viability Of Group Lending When Microfinance Meets The Market Introductionmentioning

confidence: 99%

On the Viability of Group Lending when Microfinance Meets the Market

Arnold

Reeder

Steger

2013

Journal of Emerging Market Finance

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Besley and Coate (1995) analyse the impact of joint liability and social sanctions on repayment rates when repayment enforcement is imperfect. Motivated by the microfinance industry’s move towards markets, we conduct an equilibrium analysis of the Besley–Coate model. We find that individual loan contracts may be used in market equilibrium, even though group lending entails the higher repayment rate and the lower break-even interest rate. This is because group lending causes potentially large deadweight losses. The market equilibrium is possibly characterised by financial fragility, redlining or rationing. Cooperation between borrowers and social sanctions imposed on each other in the case of strategic default turn group lending into the equilibrium mode of finance and ameliorate the market failures. JEL Classification: G21

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“…Other examples of MF papers using experimental games to study group lending and joint liability mechanisms are found in the studies of Kono (), Abbink et al . (), Werner (), Carpenter and Williams (), McIntosh et al . (), and Fischer ().…”

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confidence: 99%

Behavioral Microfinance: Evidence from a Field Experiment in Cairo

2015

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Understanding the behavior of the poor has long been an important focus of microfi nance (MF) research. On the one hand, several studies have been conducted to understand the fi nancial decisions of MF clients related to the construction of trustworthiness and social collateral (which replaces fi nancial collateral in MF loans). On the other hand, the natural counterpart of trustworthiness (i.e., risk taking) has been another main point of focus when evaluating MF clients ' behavior. Yet, most of these studies remain observational, use standard surveys about behavior, or make use of fi nancial information only -as found in many qualitative impact assessments and econometric studies. Th erefore, the usual biases when reporting stated behavior, in particular about items that are diffi cult to rationalize (such as trustworthiness and risk taking), are diffi cult to capture. Only recently have experimental games become popular in MF to gain deeper insights into MF clients and reduce these biases.Overall, the fi nancial decisions of MF clients seem complex to MF practitioners, who increasingly question the needs and wants of poor MF clients, especially after the recent crises in the MF industry. Two of the most documented diffi culties that MF institutions (MFIs) usually face are the adverse selection problem and the absence of fi nancial collateral provided by the borrower ( Giné et al ., 2010 ). In other words, MFIs serve clients without credit history, and are therefore unable to predict their willingness or ability to repay the loan. Moreover, these clients live in social neighborhoods where no one around has fi nancial reserves to cover a Microfi nance clients reveal safer fi nancial behaviors compared with non-microfi nance clients.The self-esteem of microfi nance clients is higher compared with non-microfi nance clients.MFIs should investigate in detail the structure of the social neighborhood prior to client selection.

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Moral Hazard, Peer Monitoring, and Microcredit: Field Experimental Evidence from Paraguay

Cited by 8 publications

References 22 publications

Information Asymmetry, Group Structure And Repayment: a Study from BRAC Sierra Leone

Information Asymmetry, Group Structure And Repayment: a Study from BRAC Sierra Leone

On the Viability of Group Lending when Microfinance Meets the Market

Behavioral Microfinance: Evidence from a Field Experiment in Cairo

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