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Group Versus Individual Liability: A Field Experiment in the Philippines

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  • Dean Karlan

    ()

  • Xavier Giné

Abstract

This working paper by CGD non-resident fellow Dean Karlan explores whether group liability in lending practices improves lender's overall profitability and the poor's access to financial markets. Group liability is a common microcredit lending mechanism that makes a group, rather than an individual recipient, responsible for repayment. It claims to improve repayment rates by providing incentives for peer's to screen, monitor and enforce each other's loans. But some argue that group liability actually discourages good clients from borrowing by creating tension among group members and causing dropouts, jeopardizing growth and sustainability. Also, bad clients can "free ride" off of good clients causing default rates to rise. In this paper, Karlan and his co-authors discuss the results of a field experiment at a bank in the Philippines, where they randomly reassigned half of the existing group liability centers as individual liability centers. They find that converting group liability to individual liability, while keeping aspects of group lending like weekly repayments and common meeting place, does not affect the repayment rate, and actually attracts new clients. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).

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Bibliographic Info

Paper provided by Center for Global Development in its series Working Papers with number 111.

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Length: 44 pages
Date of creation: Jan 2007
Date of revision:
Handle: RePEc:cgd:wpaper:111

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Web page: http://www.cgdev.org

Related research

Keywords: group liability; lending practices; financial markets; repayment rates; free ride; Philippines;

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References

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  1. Christian Ahlin & Robert Townsend, 2003. "Selection into and across Credit Contracts: Theory and Field Research," Vanderbilt University Department of Economics Working Papers 0323, Vanderbilt University Department of Economics.
  2. Dean S. Karlan, 2005. "Social Connections and Group Banking," Working Papers 181, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
  3. Ashok S. Rai & Tomas Sj–str–m, 2004. "Is Grameen Lending Efficient? Repayment Incentives and Insurance in Village Economies," Review of Economic Studies, Wiley Blackwell, vol. 71(1), pages 217-234, 01.
  4. Wydick, Bruce, 1999. "Can Social Cohesion Be Harnessed to Repair Market Failures? Evidence from Group Lending in Guatemala," Economic Journal, Royal Economic Society, vol. 109(457), pages 463-75, July.
  5. Dean S. Karlan, 2005. "Using Experimental Economics to Measure Social Capital and Predict Financial Decisions," American Economic Review, American Economic Association, vol. 95(5), pages 1688-1699, December.
  6. Rahman, Aminur, 1999. "Micro-credit initiatives for equitable and sustainable development: Who pays?," World Development, Elsevier, vol. 27(1), pages 67-82, January.
  7. Dean Karlan & Jonathan Zinman, 2004. "Observing unobservables: Identifying information asymmetries with a consumer credit field experiment," Natural Field Experiments 00283, The Field Experiments Website.
  8. Dean Karlan & Xavier Gine & Jonathan Morduch & Pamela Jakiela, 2006. "Microfinance Games," Working Papers 936, Economic Growth Center, Yale University.
  9. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
  10. Laffont, Jean-Jacques, 2000. "Collusion and Group Lending with Adverse Selection," IDEI Working Papers 95, Institut d'Économie Industrielle (IDEI), Toulouse.
  11. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
  12. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, vol. 4(3), pages 351-66, September.
  13. Laffont, Jean-Jacques & N'Guessan, Tchetche, 2000. "Group lending with adverse selection," European Economic Review, Elsevier, vol. 44(4-6), pages 773-784, May.
  14. Beatriz Armendariz & Jonathan Morduch, 2007. "The Economics of Microfinance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512017, December.
  15. Christian Ahlin & Robert Townsend, 2002. "Using Repayment Data to Test Across Models of Joint Liability Lending," Vanderbilt University Department of Economics Working Papers 0227, Vanderbilt University Department of Economics.
  16. de Aghion, Beatriz Armendariz & Gollier, Christian, 2000. "Peer Group Formation in an Adverse Selection Model," Economic Journal, Royal Economic Society, vol. 110(465), pages 632-43, July.
  17. Richard Montgomery, 1996. "Disciplining or protecting the poor? Avoiding the social costs of peer pressure in micro-credit schemes," Journal of International Development, John Wiley & Sons, Ltd., vol. 8(2), pages 289-305.
  18. Ghatak, Maitreesh, 2000. "Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect," Economic Journal, Royal Economic Society, vol. 110(465), pages 601-31, July.
  19. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
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  1. We should so blatantly do more randomised trials on policy
    by Ben Goldacre in Bad Science on 2011-05-14 16:30:00
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