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How Important are Peer Effects in Group Lending? Estimating a Static Game of Incomplete Information

  • Li, Shanjun
  • Liu, Yanyan
  • Deininger, Klaus W.

We quantify the importance of peer effects in group lending by estimating a static game of incomplete information. In our model, group members make their repayment decisions simultaneously based on their household and loan characteristics as well as their expectations on other members’ repayment decisions. Exploiting a rich data set of a microfinance program in India, our estimation results suggest that the likelihood of a member making a full repayment would be 15 percent higher on average if all the other follow members make full repayment compared to the case where none of the other members repay in full. We also find that large inconsistencies exist in the estimated effects of other variables in models that do not incorporate peer effects and control for unobserved heterogeneity.

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File URL: http://purl.umn.edu/49497
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Paper provided by Agricultural and Applied Economics Association in its series 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin with number 49497.

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Date of creation: May 2009
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Handle: RePEc:ags:aaea09:49497
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  1. DeanS. Karlan, 2007. "Social connections and group banking," Economic Journal, Royal Economic Society, vol. 117(517), pages F52-F84, 02.
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  12. McKelvey Richard D. & Palfrey Thomas R., 1995. "Quantal Response Equilibria for Normal Form Games," Games and Economic Behavior, Elsevier, vol. 10(1), pages 6-38, July.
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  15. Sharma, Manohar & Zeller, Manfred, 1997. "Repayment performance in group-based credit programs in Bangladesh: An empirical analysis," World Development, Elsevier, vol. 25(10), pages 1731-1742, October.
  16. Ting Zhu & Vishal Singh, 2009. "Spatial competition with endogenous location choices: An application to discount retailing," Quantitative Marketing and Economics, Springer, vol. 7(1), pages 1-35, March.
  17. Besley, T. & Coate, S., 1991. "Group Lending, Repayment Incentives And Social Collateral," Papers 152, Princeton, Woodrow Wilson School - Development Studies.
  18. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
  19. Henderson, Vernon & Mieszkowski, Peter & Sauvageau, Yvon, 1978. "Peer group effects and educational production functions," Journal of Public Economics, Elsevier, vol. 10(1), pages 97-106, August.
  20. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, vol. 4(3), pages 351-66, September.
  21. 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.
  22. Jonathan Conning, 2000. "Monitoring by Peers or by Delegates? Joint Liability Loans under Moral Hazard," Department of Economics Working Papers 2000-07, Department of Economics, Williams College.
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  24. Avi Goldfarb & Mo Xiao, 2008. "Who thinks about the competition? Managerial ability and strategic entry in US local telephone markets," Working Papers 08-21, NET Institute, revised Oct 2008.
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  28. Sharma, Manohar & Zeller, Manfred, 1996. "Repayment performance in group-based credit programs in Bangladesh," FCND discussion papers 15, International Food Policy Research Institute (IFPRI).
  29. repec:rje:randje:v:37:y:2006:3:p:619-640 is not listed on IDEAS
  30. Garikipati, Supriya, 2008. "The Impact of Lending to Women on Household Vulnerability and Women's Empowerment: Evidence from India," World Development, Elsevier, vol. 36(12), pages 2620-2642, December.
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