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Matching for Credit: Risk and Diversification in Thai Microcredit Groups

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  • Christian Ahlin
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    How has the microcredit movement managed to push financial frontiers? In a context in which borrowers vary in unobservable risk, Ghatak (1999, 2000) shows that group-based, joint liability contracts price for risk more accurately than individual contracts, provided that borrowers match homogeneously by risk-type. This more accurate risk-pricing can attract safe borrowers and rouse an otherwise dormant credit market. We extend the theory to include correlated risk, and show that borrowers will anti-diversify risk within groups, in order to lower chances of facing liability for group members. We directly test risk-matching and intra-group diversification of risk using data on Thai microcredit borrowing groups. We propose a non-parametric univariate methodology for assessing homogeneity of matching; structural multivariate analysis is carried out using Fox's (2008) matching maximum score estimator. We find evidence of a) homogeneous sorting by risk and b) risk anti-diversification within groups, though not along occupational lines. Thus there is evidence that group lending improves risk-pricing in this context and is part of the explanation of the rise in financial intermediation among the poor. However, the anti-diversification results reveal a potentially negative aspect of voluntary group formation and point to limitations of microcredit groups as risk-sharing mechanisms.[Working Paper No. 251]

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    Date of creation: Jun 2010
    Handle: RePEc:ess:wpaper:id:2588
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    1. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
    2. Ahlin, Christian & Townsend, Robert M., 2007. "Selection into and across credit contracts: Theory and field research," Journal of Econometrics, Elsevier, vol. 136(2), pages 665-698, February.
    3. Ahlin, Christian & Jiang, Neville, 2008. "Can micro-credit bring development?," Journal of Development Economics, Elsevier, vol. 86(1), pages 1-21, April.
    4. Ghatak, Maitreesh, 2000. "Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect," Economic Journal, Royal Economic Society, vol. 110(465), pages 601-631, July.
    5. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
    6. Christian Ahlin & RobertM. Townsend, 2007. "Using Repayment Data to Test Across Models of Joint Liability Lending," Economic Journal, Royal Economic Society, vol. 117(517), pages 11-51, 02.
    7. Jeremy T. Fox, 2008. "Estimating Matching Games with Transfers," NBER Working Papers 14382, National Bureau of Economic Research, Inc.
    8. Fafchamps, Marcel & Gubert, Flore, 2007. "The formation of risk sharing networks," Journal of Development Economics, Elsevier, vol. 83(2), pages 326-350, July.
    9. Shubhashis Gangopadhyay & Maitreesh Ghatak & Robert Lensink, 2005. "Joint Liability Lending and the Peer Selection Effect," Economic Journal, Royal Economic Society, vol. 115(506), pages 1005-1015, October.
    10. de Aghion, Beatriz Armendariz & Gollier, Christian, 2000. "Peer Group Formation in an Adverse Selection Model," Economic Journal, Royal Economic Society, vol. 110(465), pages 632-643, July.
    11. repec:dau:papers:123456789/4392 is not listed on IDEAS
    12. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    13. Jason Abrevaya & Jian Huang, 2005. "On the Bootstrap of the Maximum Score Estimator," Econometrica, Econometric Society, vol. 73(4), pages 1175-1204, 07.
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