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You Can Pick Your Friends, But You Need to Watch Them: Loan Screening and Enforcement in a Referrals Field Experiment

  • Bryan, Gharad
  • Karlan, Dean S.
  • Zinman, Jonathan

We examine a randomized trial that allows separate identification of peer screening and enforcement of credit contracts. A South African microlender offered half its clients a bonus for referring a friend who repaid a loan. For the remaining clients, the bonus was conditional on loan approval. After approval, the repayment incentive was removed from half the referrers in the first group and added for half those in the second. We find large enforcement effects, a $12 (100 Rand) incentive reduced default by 10 percentage points from a base of 20%. In contrast, we find no evidence of screening.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8857.

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Date of creation: Feb 2012
Date of revision:
Handle: RePEc:cpr:ceprdp:8857
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  1. Dean Karlan & Jonathan Zinman, 2005. "Observing unobservables: identifying information asymmetries with a consumer-credit field experiment," Proceedings 961, Federal Reserve Bank of Chicago.
  2. Chassang, Sylvain & Padró i Miquel, Gerard & Snowberg, Erik, 2010. "Selective Trials: A Principal-Agent Approach to Randomized Controlled Experiments," CEPR Discussion Papers 8003, C.E.P.R. Discussion Papers.
  3. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
  4. repec:oup:restud:v:60:y:1993:i:1:p:35-52 is not listed on IDEAS
  5. Stefan Klonner & Ashok Rai, 2008. "Cosigners as Collateral," Center for Development Economics 2008-08, Department of Economics, Williams College.
  6. Nava Ashraf & James Berry & Jesse M. Shapiro, 2010. "Can Higher Prices Stimulate Product Use? Evidence from a Field Experiment in Zambia," American Economic Review, American Economic Association, vol. 100(5), pages 2383-2413, December.
  7. Lori Beaman & Jeremy Magruder, 2012. "Who Gets the Job Referral? Evidence from a Social Networks Experiment," American Economic Review, American Economic Association, vol. 102(7), pages 3574-93, December.
  8. repec:oup:qjecon:v:125:y:2010:i:1:p:1-45 is not listed on IDEAS
  9. Xavier Gine & Pamela Jakiela & Dean Karlan & Jonathan Morduch, 2006. "Microfinance Games," Working Papers 2102, The Field Experiments Website.
  10. Dean S. Karlan, 2005. "Social Connections and Group Banking," Working Papers 181, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
  11. Xavier Gine & Dean Karlan, 2006. "Group versus Individual Liability: A Field Experiment in the Philippines," Working Papers 940, Economic Growth Center, Yale University.
  12. repec:ebd:wpaper:136 is not listed on IDEAS
  13. Bond, Philip & Rai, Ashok S., 2008. "Cosigned vs. group loans," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 58-80, February.
  14. Banerjee, Abhijit & Duflo, Esther, 2004. "Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program," CEPR Discussion Papers 4681, C.E.P.R. Discussion Papers.
  15. Liran Einav & Amy Finkelstein & Stephen Ryan & Paul Schrimpf & Mark Cullen, 2011. "Selection on Moral Hazard in Health Insurance," Discussion Papers 10-027, Stanford Institute for Economic Policy Research.
  16. repec:oup:qjecon:v:109:y:1994:i:2:p:491-515 is not listed on IDEAS
  17. Ashok S. Rai & Tomas Sj�str�m, 2004. "Is Grameen Lending Efficient? Repayment Incentives and Insurance in Village Economies," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 217-234.
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