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How important are peer effects in group lending?: Estimating a static game of incomplete information

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  • Li, Shanjun
  • Liu, Yanyan
  • Deininger, Klaus

Abstract

We quantify the importance of peer effects in group lending by estimating a static game of incomplete information. In our model, group members make their repayment decisions simultaneously based on their household and loan characteristics as well as their expectations on other members' repayment decisions. Exploiting a rich data set of a microfinance program in India, our estimation results suggest that the probability of a member making a full repayment would be 15 percentage points higher if all the other fellow members make full repayment compared to the case where none of the other members repay in full. We also find that large inconsistencies exist in the estimated effects of other variables in models that do not incorporate peer effects and control for unobserved heterogeneity.

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Bibliographic Info

Paper provided by International Food Policy Research Institute (IFPRI) in its series IFPRI discussion papers with number 940.

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Date of creation: 2009
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Handle: RePEc:fpr:ifprid:940

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Keywords: group lending; Microfinance; peer effects; repayment; group heterogeneity; peer pressure;

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  1. Stephen Ryan & Patrick Bajari & Han Hong, 2005. "Identification and Estimation of Discrete Games of Complete Information," Computing in Economics and Finance 2005 53, Society for Computational Economics.
  2. Zeller, Manfred, 1998. "Determinants of Repayment Performance in Credit Groups: The Role of Program Design, Intragroup Risk Pooling, and Social Cohesion," Economic Development and Cultural Change, University of Chicago Press, vol. 46(3), pages 599-620, April.
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