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Group Versus Individual Liability: A Field Experiment in the Philippines

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Author Info
Dean Karlan ()
Xavier Giné

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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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Publisher 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

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

Other versions of this item:

Find related papers by JEL classification:
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
M20 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - General
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Christian Ahlin & Robert Townsend, 2002. "Using Repayment Data to Test Across Models of Joint Liability Lending," Working Papers 0227, Department of Economics, Vanderbilt University. [Downloadable!]
  2. Karlan, Dean S. & Zinman, Jonathan, 2007. "Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment," CEPR Discussion Papers 6182, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October. [Downloadable!] (restricted)
  4. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December. [Downloadable!] (restricted)
  5. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February. [Downloadable!] (restricted)
    Other versions:
  6. Christian Ahlin & Robert Townsend, 2003. "Selection into and across Credit Contracts: Theory and Field Research," Working Papers 0323, Department of Economics, Vanderbilt University. [Downloadable!]
  7. Dean S. Karlan, 2005. "Social Connections and Group Banking," Working Papers 913, Economic Growth Center, Yale University. [Downloadable!]
    Other versions:
  8. 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.
  9. Beatriz Armendariz & Jonathan Morduch, 2007. "The Economics of Microfinance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512017.
  10. 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. [Downloadable!] (restricted)
  11. Ashok S. Rai & Tomas Sj–str–m, 2004. "Is Grameen Lending Efficient? Repayment Incentives and Insurance in Village Economies," Review of Economic Studies, Blackwell Publishing, vol. 71(1), pages 217-234, 01. [Downloadable!] (restricted)
  12. Rahman, Aminur, 1999. "Micro-credit initiatives for equitable and sustainable development: Who pays?," World Development, Elsevier, vol. 27(1), pages 67-82, January. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gonzalez, Adrian, 2007. "Resilience of Microfinance Institutions to National Macroeconomic Events: An Econometric Analysis of MFI asset quality," MPRA Paper 4317, University Library of Munich, Germany. [Downloadable!]
  2. Hisaki Kono, 2006. "Is Group Lending A Good Enforcement Scheme for Achieving High Repayment Rates? Evidence from Field Experiments in Vietnam," Artefactual Field Experiments 0063, The Field Experiments Website. [Downloadable!]
    Other versions:
  3. Marie Godquin & Agnes R. Quisumbing, 2008. "Separate but equal? The gendered nature of social capital in rural Philippine communities," Journal of International Development, John Wiley & Sons, Ltd., vol. 20(1), pages 13-33. [Downloadable!]
  4. Steven D. Levitt & John A. List, 2008. "Field Experiments in Economics: The Past, The Present, and The Future," NBER Working Papers 14356, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Karlan, Dean S., 2007. "Social Connections and Group Banking," CEPR Discussion Papers 6194, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. 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. [Downloadable!]
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