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Repayment and Exclusion in a Microfinance Experiment

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Author Info

  • Jean-Marie Baland
  • Lata Gangadharan
  • Pushkar Maitra
  • Rohini Somanathan

Abstract

Microfinance groups often engage in a variety of collective activities not directly related to credit. Groups can sanction members who default on their loans by excluding them from these activities. Our experiment is designed to explore the effectiveness of such sanctions in improving repayment incentives. Groups of 10 members are provided with joint-liability loans for a specific investment project. If groups repay their loans, contributing members have the option of excluding other members and those that remain play a public goods game. By varying loan sizes across groups and allowing for heterogeneous gains from the public good within groups, we identify the role of incentives in repayment decisions. In line with theoretical predictions, groups with the largest repayment burdens have the highest default rates and within groups, individual decisions to contribute to loan repayment depend on gains from the public good game.

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Bibliographic Info

Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 12-13.

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Length: 24 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:mos:moswps:2013-12

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Related research

Keywords: Microfinance; Joint Liability; Social Exclusion; Public Good; Heterogeneous Productivity; Laboratory Experiments.;

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Cited by:
  1. Sugato Chakravarty & S. M. Zahid Iqbal & Abu Zafar M. Shahriar, 2013. "Are Women “Naturally” Better Credit Risks in Microcredit? Evidence from Field Experiments in Patriarchal and Matrilineal Societies in Bangladesh," Working Papers 1019, Purdue University, Department of Consumer Sciences.

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