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Is Group Lending A Good Enforcement Scheme for Achieving High Repayment Rates?: Evidence from Field Experiments in Vietnam

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  • Kono, Hisaki

Abstract

Microfinance institutions employ various kinds of incentive schemes but estimating the effect of each scheme is not easy due to endogeneity bias. We conducted field experiments in Vietnam to capture the role of joint liability, monitoring, cross-reporting, social sanctions, communication and group formation in borrowers’ repayment behavior. We find that joint liability contracts cause serious free-riding problems, inducing strategic default and lowering repayment rates. When group members observe each others’ investment returns, participants are more likely to choose strategic default. Even after introducing a cross-reporting system and/or penalties among borrowers, the default rates and the ratios of participants who chose strategic default under joint liability are still higher than those under individual lending. We also find that joint liability lending often failed to induce mutual insurance among borrowers. Those who had been helped or who had repaid a little in the previous round were more likely to default strategically and repay a little again in the current round and those who paid large amounts were always the same individuals.

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File URL: http://ir.ide.go.jp/dspace/bitstream/2344/128/3/ARRIDE_Discussion_No.061_Kono.pdf
File Function: First version, 2006
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Bibliographic Info

Paper provided by Institute of Developing Economies, Japan External Trade Organization(JETRO) in its series IDE Discussion Papers with number 61.

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Date of creation: May 2006
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Publication status: Published in IDE Discussion Paper. No. 61. 2006.5
Handle: RePEc:jet:dpaper:dpaper61

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Related research

Keywords: Microfinance; Joint liability; Free-riding; Vietnam;

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Cited by:
  1. Simon Cornée & David Masclet, 2013. "Long-Term Relationships, Group lending and Peer Sanctioning in Microfinance: New Experimental Evidence," Working Papers CEB 13-026, ULB -- Universite Libre de Bruxelles.
  2. 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.
  3. Paul, Sohini, 2013. "The Credit-worthiness of a borrower and the selection process in Micro-finance: A case study from the urban slums of India," MPRA Paper 48116, University Library of Munich, Germany.
  4. Chen, Joe & Choi, Yun Jeong & Sawada, Yasuyuki, 2010. "Joint liability borrowing and suicide: The case of Japan," Economics Letters, Elsevier, vol. 109(2), pages 69-71, November.
  5. Kurosaki, Takashi & Khan, Hidayat Ullah, 2011. "Vulnerability of Microfinance to Strategic Default and Covariate Shocks:Evidence from Pakistan," PRIMCED Discussion Paper Series 10, Institute of Economic Research, Hitotsubashi University.
  6. Joe Chen & Yun Jeong Choi & Yasuyuki Sawada, 2007. "Joint Liability Borrowing and Suicide," CIRJE F-Series CIRJE-F-534, CIRJE, Faculty of Economics, University of Tokyo.
  7. Jeffrey Carpenter & Tyler Williams, 2010. "Moral hazard, peer monitoring, and microcredit: field experimental evidence from Paraguay," Working Papers 10-6, Federal Reserve Bank of Boston.

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