Moral Hazard and Peer Monitoring in a Laboratory Microfinance Experiment
Abstract
Most problems with formal sector credit lending to the poor in developing countries can be attributed to the lack of information and inadequate collateral. One common feature of successful credit mechanisms is group-lending, where the loan is advanced to an individual if he/she is a part of a group and members of the borrowing group can monitor each other. Since group members have better information about each other compared to lenders, peer monitoring is often less expensive than lender monitoring. Theoretically this leads to greater monitoring and greater rates of loan repayments. This paper reports the results from a laboratory experiment of group lending in the presence of moral hazard and (costly) peer monitoring. We compare peer monitoring treatments when credit is provided to members of the group sequentially and simultaneously, and individual lending with lender monitoring. The results depend on the relative cost of monitoring by the peer vis-à-vis the lender. In the more typical case where the cost of peer monitoring is lower than the cost of lender monitoring, our results suggest that peer monitoring results in higher loan frequencies, higher monitoring and higher repayment rates compared to lender monitoring. In the absence of monitoring cost differences, performance is mostly similar across group and individual lending schemes, although loan frequencies and monitoring rates are sometimes modestly greater with group lending. Within group lending, although the dynamic incentives provided by sequential leading generate the greatest equilibrium surplus, simultaneous group leading provides equivalent empirical performance.Download Info
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Paper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1208.Length: 48 pages
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:pur:prukra:1208
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Keywords: Group Lending; Monitoring; Moral Hazard; Laboratory Experiment; Loans; Development;Other versions of this item:
- Cason, Timothy N. & Gangadharan, Lata & Maitra, Pushkar, 2012. "Moral hazard and peer monitoring in a laboratory microfinance experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 192-209.
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- O2 - Economic Development, Technological Change, and Growth - - Development Planning and Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-05-10 (All new papers)
- NEP-CBE-2008-05-10 (Cognitive & Behavioural Economics)
- NEP-CTA-2008-05-10 (Contract Theory & Applications)
- NEP-DEV-2008-05-10 (Development)
- NEP-EXP-2008-05-10 (Experimental Economics)
- NEP-MFD-2008-05-10 (Microfinance)
- NEP-SOC-2008-05-10 (Social Norms & Social Capital)
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Nargiza Maksudova, 2009. "Microfinance in Uzbekistan : market overview and impact assessment needs," Memoranda - Policy Papers 39, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
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- Jean-Marie Baland & Lata Gangadharan & Pushkar Maitra & Rohini Somanathan, 2013.
"Repayment and Exclusion in a Microfinance Experiment,"
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12-13, Monash University, Department of Economics.
- Jean-Marie Baland & Lata Gangadharan & Pushkar Maitra & Rohini Somanathan, 2013. "Repayment And Exclusion In A Microfinance Experiment," Working papers 227, Centre for Development Economics, Delhi School of Economics.
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