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Peer Monitoring, Social Ties and Moral Hazard in Group Lending Programs: Evidence from Eritrea

  • Hermes, Niels
  • Lensink, Robert
  • Mehrteab, Habteab T.

In this paper, we provide an empirical analysis of the impact of monitoring and social ties within group lending programs on moral hazard behavior of its participants, based on data from an extensive questionnaire held in Eritrea among participants of 102 groups. We find support for the fact that peer monitoring by and social ties of group leaders do help to reduce moral hazard behavior of group members. In contrast, peer monitoring by and social ties of other group members are not related to reducing the occurrence of moral hazard within groups.

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Article provided by Elsevier in its journal World Development.

Volume (Year): 33 (2005)
Issue (Month): 1 (January)
Pages: 149-169

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Handle: RePEc:eee:wdevel:v:33:y:2005:i:1:p:149-169
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  1. Armendariz de Aghion, Beatriz, 1999. "On the design of a credit agreement with peer monitoring," Journal of Development Economics, Elsevier, vol. 60(1), pages 79-104, October.
  2. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
  3. Matthew Warning & Elisabeth Sadoulet, 1998. "The performance of village intermediaries in rural credit delivery under changing penalty regimes: Evidence from Senegal," Journal of Development Studies, Taylor & Francis Journals, vol. 35(1), pages 115-138.
  4. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, vol. 4(3), pages 351-66, September.
  5. Ghatak, M. & Guinnane, T.W., 1998. "The Economics of Lending with Joint Liability: Theory and Practice," Papers 791, Yale - Economic Growth Center.
  6. Wydick, Bruce, 2001. "Group Lending under Dynamic Incentives as a Borrower Discipline Device," Review of Development Economics, Wiley Blackwell, vol. 5(3), pages 406-20, October.
  7. Besley, T. & Coate, S., 1991. "Group Lending, Repayment Incentives And Social Collateral," Papers 152, Princeton, Woodrow Wilson School - Development Studies.
  8. Wydick, Bruce, 1999. "Can Social Cohesion Be Harnessed to Repair Market Failures? Evidence from Group Lending in Guatemala," Economic Journal, Royal Economic Society, vol. 109(457), pages 463-75, July.
  9. Aryeetey, Ernest & Udry, Christopher, 1997. "The Characteristics of Informal Financial Markets in Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 6(1), pages 161-203, March.
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