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Repayment And Exclusion In A Microfinance Experiment

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  • Jean-Marie Baland

    (University of Namur BREAD and CEPR)

  • Lata Gangadharan

    (Monash University)

  • Pushkar Maitra

    (Monash University)

  • Rohini Somanathan

    (Department of Economics, Delhi School of Economics, Delhi, India)

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    Abstract

    Microfinance groups often engage in a variety of collective activities not directly related to credit. Groups can sanction members who default on their loans by excluding them from these activities. Our experiment is designed to explore the effectiveness of such sanctions in improving repayment incentives. Groups of 10 members are provided with joint-liability loans for a specific investment project. If groups repay their loans, contributing members have the option of excluding other members and those that remain play a public goods game. By varying loan sizes across groups and allowing for heterogeneous gains from the public good within groups, we identify the role of incentives in repayment decisions. In line with theoretical predictions, groups with the largest repayment burdens have the highest default rates and within groups, individual decisions to contribute to loan repayment depend on gains from the public good game.

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    Bibliographic Info

    Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 227.

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    Length: 24 pages
    Date of creation: Feb 2013
    Date of revision:
    Handle: RePEc:cde:cdewps:227

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    Related research

    Keywords: Microfinance; Joint Liability; Social Exclusion; Public Good; Heterogeneous Pro- ductivity; Laboratory Experiments.;

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    References

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    1. Fellner, Gerlinde & Iida, Yoshio & Kröger, Sabine & Seki, Erika, 2011. "Heterogeneous Productivity in Voluntary Public Good Provision: An Experimental Analysis," IZA Discussion Papers 5556, Institute for the Study of Labor (IZA).
    2. Besley, T. & Coate, S., 1991. "Group Lending, Repayment Incentives And Social Collateral," Papers, Princeton, Woodrow Wilson School - Development Studies 152, Princeton, Woodrow Wilson School - Development Studies.
    3. Siwan Anderson & Jean-Marie Baland, 2002. "The Economics Of Roscas And Intrahousehold Resource Allocation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(3), pages 963-995, August.
    4. Timothy N. Cason & Lata Gangadharan & Pushkar Maitra, 2008. "Moral Hazard and Peer Monitoring in a Laboratory Microfinance Experiment," Purdue University Economics Working Papers 1208, Purdue University, Department of Economics.
    5. repec:att:wimass:9309 is not listed on IDEAS
    6. Ernst Fehr & Simon Gaechter, 1999. "Cooperation and Punishment in Public Goods Experiments," CESifo Working Paper Series 183, CESifo Group Munich.
    7. Urs Fischbacher & Simon Gaechter, 2009. "Social Preferences, Beliefs, and the Dynamics of Free Riding in Public Good Experiments," Discussion Papers, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham 2009-04, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    8. Klaus Abbink & Bernd Irlenbusch, 2004. "Group Size and Social Ties in Microfinance Institutions," Econometric Society 2004 Far Eastern Meetings, Econometric Society 404, Econometric Society.
    9. Jean-Marie Baland & Rohini Somanathan & Lore Vandewalle, 2007. "Microfinance Lifespans: A Study of Attrition and Exclusion in Self-Help Groups in India," India Policy Forum, Global Economy and Development Program, The Brookings Institution, Global Economy and Development Program, The Brookings Institution, vol. 4(1), pages 159-210.
    10. Nikiforakis, Nikos, 2008. "Punishment and counter-punishment in public good games: Can we really govern ourselves," Journal of Public Economics, Elsevier, Elsevier, vol. 92(1-2), pages 91-112, February.
    11. Cinyabuguma, Matthias & Page, Talbot & Putterman, Louis, 2005. "Cooperation under the threat of expulsion in a public goods experiment," Journal of Public Economics, Elsevier, Elsevier, vol. 89(8), pages 1421-1435, August.
    12. Andreoni, James, 1995. "Cooperation in Public-Goods Experiments: Kindness or Confusion?," American Economic Review, American Economic Association, American Economic Association, vol. 85(4), pages 891-904, September.
    13. Fangfang Tan, 2008. "Punishment in a Linear Public Good Game with Productivity Heterogeneity," De Economist, Springer, Springer, vol. 156(3), pages 269-293, September.
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