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Peer Monitoring and Microcredit: Field Experimental Evidence from Paraguay

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  • Jeffrey Carpenter
  • Tyler Williams

Abstract

Given the substantial amount of resources currently invested in microcredit programmes, it is more important than ever to accurately assess the extent to which peer monitoring actually reduces moral hazard among borrowers faced with group liability. We conduct a field experiment with women about to enter a group loan programme in Paraguay and then gather administrative data on their repayment behaviour in the 6-month period after the experiment. In addition to the experiment, which is designed to measure individual propensities to monitor one's peers, we collect a variety of other potential correlates of behaviour and repayment. Controlling for other factors, we find a very strong causal relationship between the average monitoring propensity of a person's loan group and repayment. Our most conservative estimate suggests that borrowers in highly monitored groups are 36% less likely to have problems repaying their portions of the loan. In addition, confirming previous results, we also find some evidence that risk preferences, social preferences and cognitive skills affect repayment.

Suggested Citation

  • Jeffrey Carpenter & Tyler Williams, 2014. "Peer Monitoring and Microcredit: Field Experimental Evidence from Paraguay," Oxford Development Studies, Taylor & Francis Journals, vol. 42(1), pages 111-135, March.
    • Handle: RePEc:taf:oxdevs:v:42:y:2014:i:1:p:111-135
    DOI: 10.1080/13600818.2014.887061
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    References listed on IDEAS

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    1. Kono, Hisaki, 2006. "Is Group Lending A Good Enforcement Scheme for Achieving High Repayment Rates?: Evidence from Field Experiments in Vietnam," IDE Discussion Papers 61, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    2. Juan Camilo Cárdenas & Jeffrey Carpenter, 2010. "Risk Attitudes and Well-being in Latin America," Documentos CEDE 7718, Universidad de los Andes, Facultad de Economía, CEDE.
    3. Cason, Timothy N. & Gangadharan, Lata & Maitra, Pushkar, 2012. "Moral hazard and peer monitoring in a laboratory microfinance experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 192-209.
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    2. Czura, Kristina, 2015. "Pay, peek, punish? Repayment, information acquisition and punishment in a microcredit lab-in-the-field experiment," Journal of Development Economics, Elsevier, vol. 117(C), pages 119-133.
    3. Goto, Jun & Sawada, Yasuyuki & Aida, Takeshi & Aoyagi, Keitaro, 2015. "Incentives and Social Preferences: Experimental Evidence from a Seemingly Inefficienct Traditional Labor Contract," 2015 Conference, August 9-14, 2015, Milan, Italy 211687, International Association of Agricultural Economists.
    4. Cornée, Simon & Masclet, David, 2022. "Long-term relationships, group lending, and peer monitoring in microfinance: Experimental evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 100(C).
    5. Cameron, Alistair & Oak, Mandar & Shan, Yaping, 2021. "Peer monitoring and Islamic microfinance," Journal of Economic Behavior & Organization, Elsevier, vol. 184(C), pages 337-358.

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