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Identification strategy : a field experiment on dynamic incentives in rural credit markets

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Author Info

  • Gine, Xavier
  • Goldberg, Jessica
  • Yang, Dean

Abstract

How do borrowers respond to improvements in a lender's ability to punish defaulters? This paper reports the results of a randomized field experiment in rural Malawi that examines the impact of fingerprinting borrowers in a context where a unique identification system is absent. Fingerprinting allows the lender to more effectively use dynamic repayment incentives: withholding future loans from past defaulters while rewarding good borrowers with better loan terms. Consistent with a simple model of borrower heterogeneity and information asymmetries, fingerprinting led to substantially higher repayment rates for borrowers with the highest ex ante default risk, but had no effect for the rest of the borrowers. The change in repayment rates is driven by reductions in adverse selection (smaller loan sizes) and lower moral hazard (for example, less diversion of loan-financed fertilizer from its intended use on the cash crop).

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5438.

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Date of creation: 01 Oct 2010
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Handle: RePEc:wbk:wbrwps:5438

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Related research

Keywords: Access to Finance; Debt Markets; Bankruptcy and Resolution of Financial Distress; Microfinance; Economic Theory&Research;

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References

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  1. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 195-209, April.
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  14. Gine, Xavier & Yang, Dean, 2007. "Insurance, credit, and technology adoption : field experimental evidence from Malawi," Policy Research Working Paper Series 4425, The World Bank.
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Cited by:
  1. Beck, T.H.L. & Munzele Maimbo, S. & Faye, I. & Triki, T., 2011. "Financing Africa: Through the crisis and beyond," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4758568, Tilburg University.
  2. Caterina Giannetti & Nicola Jentzsch, 2011. "Credit Reporting, Access to Finance and Identification Systems: International Evidence," Jena Economic Research Papers 2011-031, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.

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