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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. 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.
  2. Sylvain Chassang & Gerard Padro i Miquel & Erik Snowberg, 2010. "Selective Trials: A Principal-Agent Approach to Randomized Controlled Experiments," NBER Working Papers 16343, National Bureau of Economic Research, Inc.
  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.
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  10. Galor, Oded & Zeira, Joseph, 1988. "Income Distribution and Macroeconomics," MPRA Paper 51644, University Library of Munich, Germany, revised 01 Sep 1989.
  11. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
  12. Banerjee, Abhijit V & Besley, Timothy & Guinnane, Timothy W, 1994. "Thy Neighbor's Keeper: The Design of a Credit Cooperative with Theory and a Test," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 491-515, May.
  13. Orazio Attanasio & Britta Augsburg & Ralph de Haas & Emla Fitzsimons & Heike Harmgart, 2011. "Group lending or individual lending? Evidence from a randomised field experiment in Mongolia," IFS Working Papers W11/20, Institute for Fiscal Studies.
  14. Bond, Philip & Rai, Ashok S., 2008. "Cosigned vs. group loans," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 58-80, February.
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  16. Stefan Klonner & Ashok Rai, 2008. "Cosigners as Collateral," Center for Development Economics 2008-08, Department of Economics, Williams College.
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