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Moral hazard and peer monitoring in a laboratory microfinance experiment

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  • Cason, Timothy N.
  • Gangadharan, Lata
  • Maitra, Pushkar

Abstract

This paper reports the results from a laboratory microfinance experiment of group lending in the presence of moral hazard and (costly) peer monitoring. We compare peer monitoring treatments in which credit is provided to members of the group to individual lending treatments with lender monitoring. We find that if the cost of peer monitoring is lower than the cost of lender monitoring, peer monitoring results in higher loan frequencies, higher monitoring and higher repayment rates compared to lender monitoring. In the absence of monitoring cost differences, however, lending, monitoring and repayment behavior is mostly similar across group and individual lending schemes. Within group lending, contrary to theoretical predictions, simultaneous and sequential lending rules provide equivalent empirical performance.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 82 (2012)
Issue (Month): 1 ()
Pages: 192-209

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Handle: RePEc:eee:jeborg:v:82:y:2012:i:1:p:192-209

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Keywords: Group lending; Monitoring; Moral hazard; Laboratory experiment; Credit; Development;

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Citations

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Cited by:
  1. El-Komi, Mohamed & Croson, Rachel, 2013. "Experiments in Islamic microfinance," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 252-269.
  2. Nargiza Maksudova, 2009. "Microfinance in Uzbekistan : market overview and impact assessment needs," Memoranda - Policy Papers 39, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  3. Wei Zhang & Haifeng Li & Shigenori Ishida & Eric Park, 2010. "China’s Non-governmental Microcredit Practice: History and Challenges," Journal of Family and Economic Issues, Springer, vol. 31(3), pages 280-296, September.
  4. Simon Cornée & David Masclet, 2013. "Long-Term Relationships, Group lending and Peer Sanctioning in Microfinance: New Experimental Evidence," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201316, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  5. Jean-Marie Baland & Lata Gangadharan & Pushkar Maitra & Rohini Somanathan, 2013. "Repayment And Exclusion In A Microfinance Experiment," Working papers 227, Centre for Development Economics, Delhi School of Economics.
  6. Jeffrey Carpenter & Tyler Williams, 2010. "Moral hazard, peer monitoring, and microcredit: field experimental evidence from Paraguay," Working Papers 10-6, Federal Reserve Bank of Boston.
  7. ZOUARI, Zeineb & NABI, Mahmoud Sami, 2013. "Enhancing the Enforceability of Islamic Microfinance Contracts in OIC countries," MPRA Paper 49816, University Library of Munich, Germany.

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