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Repayment And Exclusion In A Microfinance Experiment

  • Jean-Marie Baland

    (University of Namur BREAD and CEPR)

  • Lata Gangadharan

    (Monash University)

  • Pushkar Maitra

    (Monash University)

  • Rohini Somanathan

    (Department of Economics, Delhi School of Economics, Delhi, India)

Registered author(s):

    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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    Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 227.

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    Length: 24 pages
    Date of creation: Feb 2013
    Date of revision:
    Handle: RePEc:cde:cdewps:227
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    1. Urs Fischbacher & Simon Gaechter, 2009. "Social Preferences, Beliefs, and the Dynamics of Free Riding in Public Good Experiments," Discussion Papers 2009-04, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    2. Gerlinde Fellner & Yoshio Iida & Sabine Kröger & Erika Seki, 2010. "Heterogeneous productivity in voluntary public good provision - An experimental analysis," Department of Economics Working Papers wuwp133, Vienna University of Economics and Business, Department of Economics.
    3. S. Mahendra Dev, 2008. "India," Chapters, in: Handbook on the South Asian Economies, chapter 1 Edward Elgar.
    4. 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.
    5. Fangfang Tan, 2008. "Punishment in a Linear Public Good Game with Productivity Heterogeneity," De Economist, Springer, vol. 156(3), pages 269-293, September.
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    7. Abbink, Klaus & Bernd Irlenbusch & Elke Renner, 2002. "Group Size and Social Ties in Microfinance Institutions," Royal Economic Society Annual Conference 2003 1, Royal Economic Society.
    8. Simon Gachter & Ernst Fehr, 2000. "Cooperation and Punishment in Public Goods Experiments," American Economic Review, American Economic Association, vol. 90(4), pages 980-994, September.
    9. Andreoni, James, 1995. "Cooperation in Public-Goods Experiments: Kindness or Confusion?," American Economic Review, American Economic Association, vol. 85(4), pages 891-904, September.
    10. Anderson, K.S. & Baland, J-M., 2000. "The Economics of Roscas and Intra-Household Resource Allocation," Discussion Paper 2000-83, Tilburg University, Center for Economic Research.
    11. Besley, T. & Coate, S., 1991. "Group Lending, Repayment Incentives And Social Collateral," Papers 152, Princeton, Woodrow Wilson School - Development Studies.
    12. Jean-Marie Baland & Rohini Somanathan & Lore Vandewalle, 2007. "Microfinance Lifespans: A Study of Attrition and Exclusion in Self-Help Groups in India," India Policy Forum, Global Economy and Development Program, The Brookings Institution, vol. 4(1), pages 159-210.
    13. Nikiforakis, Nikos, 2008. "Punishment and counter-punishment in public good games: Can we really govern ourselves," Journal of Public Economics, Elsevier, vol. 92(1-2), pages 91-112, February.
    14. Siwan Anderson, 2000. "The Economics of Roscas and Intra-Household Resource Allocation," Econometric Society World Congress 2000 Contributed Papers 1323, Econometric Society.
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