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

  • Gharad Bryan

    ()

    (London School of Economics)

  • Dean Karlan

    ()

    (Economic Growth Center, Yale University)

  • Jonathan Zinman

    ()

    (Dartmouth College)

Registered author(s):

    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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    File URL: http://www.econ.yale.edu/growth_pdf/cdp1009.pdf
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    Paper provided by Economic Growth Center, Yale University in its series Working Papers with number 1009.

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    Length: 38 pages
    Date of creation: Jan 2012
    Date of revision:
    Handle: RePEc:egc:wpaper:1009
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    1. Karlan, Dean S. & Zinman, Jonathan, 2007. "Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment," CEPR Discussion Papers 6182, C.E.P.R. Discussion Papers.
    2. Dean Karlan & Jonathan Morduch & Pamela Jakiela & Xavier Gine, 2006. "Microfinance games," Framed Field Experiments 00150, The Field Experiments Website.
    3. Liran Einav & Amy Finkelstein & Stephen P. Ryan & Paul Schrimpf & Mark R. Cullen, 2011. "Selection on Moral Hazard in Health Insurance," NBER Working Papers 16969, National Bureau of Economic Research, Inc.
    4. Stefan Klonner & Ashok Rai, 2008. "Cosigners as Collateral," Department of Economics Working Papers 2008-04, Department of Economics, Williams College.
    5. Banerjee, Abhijit V & Besley, Timothy & Guinnane, Timothy W, 1994. "Thy Neighbor's Keeper: The Design of a Credit Cooperative with Theory and a Test," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 491-515, May.
    6. Jessica Cohen & Pascaline Dupas, 2010. "Free Distribution or Cost-Sharing? Evidence from a Randomized Malaria Prevention Experiment," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 1-45, February.
    7. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
    8. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
    9. Nava Ashraf & James Berry & Jesse M. Shapiro, 2007. "Can Higher Prices Stimulate Product Use? Evidence from a Field Experiment in Zambia," NBER Working Papers 13247, National Bureau of Economic Research, Inc.
    10. Attanasio, Orazio & Augsburg, Britta & de Haas, Ralph & Fitzsimons, Emla & Harmgart, Heike, 2014. "Group lending or individual lending? Evidence from a randomised field experiment in Mongolia," Discussion Papers, Research Unit: Economics of Change SP II 2014-303, Social Science Research Center Berlin (WZB).
    11. 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.
    12. DeanS. Karlan, 2007. "Social connections and group banking," Economic Journal, Royal Economic Society, vol. 117(517), pages F52-F84, 02.
    13. Dean Karlan & Xavier Gine & Jonathan Morduch & Pamela Jakiela, 2006. "Microfinance Games," Working Papers 936, Economic Growth Center, Yale University.
    14. 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.
    15. Ashok S. Rai & Tomas Sj–str–m, 2004. "Is Grameen Lending Efficient? Repayment Incentives and Insurance in Village Economies," Review of Economic Studies, Wiley Blackwell, vol. 71(1), pages 217-234, 01.
    16. Xavier Gine & Dean Karlan, 2006. "Group versus Individual Liability: A Field Experiment in the Philippines," Working Papers 940, Economic Growth Center, Yale University.
    17. Bond, Philip & Rai, Ashok S., 2008. "Cosigned vs. group loans," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 58-80, February.
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