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You Can Pick Your Friends, But You Need to Watch Them: Loan Screening and Enforcement in a Referrals Field Experiment

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  • Bryan, Gharad
  • Karlan, Dean S.
  • Zinman, Jonathan

Abstract

We examine a randomized trial that allows separate identification of peer screening and enforcement of credit contracts. A South African microlender offered half its clients a bonus for referring a friend who repaid a loan. For the remaining clients, the bonus was conditional on loan approval. After approval, the repayment incentive was removed from half the referrers in the first group and added for half those in the second. We find large enforcement effects, a $12 (100 Rand) incentive reduced default by 10 percentage points from a base of 20%. In contrast, we find no evidence of screening.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8857.

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Date of creation: Feb 2012
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Handle: RePEc:cpr:ceprdp:8857

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Keywords: credit market failures; Information asymmetries; peer networks; social capital; social networks;

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References

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  1. Dean S. Karlan & Jonathan Zinman, 2005. "Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment," Working Papers, Economic Growth Center, Yale University 911, Economic Growth Center, Yale University.
  2. Stefan Klonner & Ashok Rai, 2008. "Cosigners as Collateral," Department of Economics Working Papers 2008-04, Department of Economics, Williams College.
  3. Attanasio, Orazio & Augsburg, Britta & De Haas, Ralph & Fitzsimons, Emla & Harmgart, Heike, 2011. "Group lending or individual lending? Evidence from a randomised field experiment in Mongolia," MPRA Paper 35439, University Library of Munich, Germany.
  4. Dean Karlan & Xavier Giné, 2007. "Group Versus Individual Liability: A Field Experiment in the Philippines," Working Papers, Center for Global Development 111, Center for Global Development.
  5. Sylvain Chassang & Gerard Padro I Miquel & Erik Snowberg, 2012. "Selective Trials: A Principal-Agent Approach to Randomized Controlled Experiments," American Economic Review, American Economic Association, vol. 102(4), pages 1279-1309, June.
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  8. Nava Ashraf & James Berry & Jesse M. Shapiro, 2010. "Can Higher Prices Stimulate Product Use? Evidence from a Field Experiment in Zambia," American Economic Review, American Economic Association, vol. 100(5), pages 2383-2413, December.
  9. Xavier Gine & Pamela Jakiela & Dean Karlan & Jonathan Morduch, 2006. "Microfinance Games," Working Papers, The Field Experiments Website 2102, The Field Experiments Website.
  10. Bond, Philip & Rai, Ashok S., 2008. "Cosigned vs. group loans," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 58-80, February.
  11. Lori Beaman & Jeremy Magruder, 2012. "Who Gets the Job Referral? Evidence from a Social Networks Experiment," American Economic Review, American Economic Association, vol. 102(7), pages 3574-93, December.
  12. Galor, Oded & Zeira, Joseph, 1988. "Income Distribution and Macroeconomics," MPRA Paper 51644, University Library of Munich, Germany, revised 01 Sep 1989.
  13. Liran Einav & Amy Finkelstein & Stephen P. Ryan & Paul Schrimpf & Mark R. Cullen, 2013. "Selection on Moral Hazard in Health Insurance," American Economic Review, American Economic Association, vol. 103(1), pages 178-219, February.
  14. 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, Wiley Blackwell, vol. 71(1), pages 217-234, 01.
  15. Jessica Cohen & Pascaline Dupas, 2010. "Free Distribution or Cost-Sharing? Evidence from a Randomized Malaria Prevention Experiment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 125(1), pages 1-45, February.
  16. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
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