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Moral hazard, peer monitoring, and microcredit: field experimental evidence from Paraguay

  • Jeffrey Carpenter
  • Tyler Williams

Given the substantial amount of resources currently invested in microcredit programs, it is more important than ever to accurately assess the extent to which peer monitoring by borrowers faced with group liability contracts actually reduces moral hazard. We conduct a field experiment with women about to enter a group loan program in Paraguay and then gather administrative data on the members' repayment behavior in the six-month period following the experiment. In addition to the experiment which is designed to measure individual propensities to monitor under incentives similar to group liability, we collect a variety of the other potential correlates of borrowing behavior and repayment. Controlling for other factors, we find a very strong causal relationship between the monitoring propensity of one's loan group and repayment. Our lowest estimate suggests that borrowers in groups with above median monitoring are 36 percent less likely to have a problem repaying their portion of the loan. Besides confirming a number of previous results, we also find some evidence that risk preferences, social preferences, and cognitive skills affect repayment.

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Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 10-6.

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Date of creation: 2010
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Handle: RePEc:fip:fedbwp:10-6
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  1. Hisaki Kono, 2006. "Is group lending a good enforcement scheme for achieving high repayment rates? Evidence from field experiments in vietnam," Artefactual Field Experiments 00075, The Field Experiments Website.
  2. 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..
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  4. Timothy N. Cason & Lata Gangadharan & Pushkar Maitra, 2008. "Moral Hazard and Peer Monitoring in a Laboratory Microfinance Experiment," Purdue University Economics Working Papers 1208, Purdue University, Department of Economics.
  5. 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 F11-F51, 02.
  6. Klaus Abbink & Bernd Irlenbusch & Elke Renner, 2006. "Group Size and Social Ties in Microfinance Institutions," Economic Inquiry, Western Economic Association International, vol. 44(4), pages 614-628, October.
  7. Jeffrey Carpenter & Erika Seki, 2005. "Do Social PreferencesIncrease Productivity? Field experimental evidence from fishermen in Toyoma Bay," Middlebury College Working Paper Series 0515, Middlebury College, Department of Economics.
  8. 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.
  9. Forsythe Robert & Horowitz Joel L. & Savin N. E. & Sefton Martin, 1994. "Fairness in Simple Bargaining Experiments," Games and Economic Behavior, Elsevier, vol. 6(3), pages 347-369, May.
  10. David Reiley & John List, 2008. "Field experiments," Artefactual Field Experiments 00091, The Field Experiments Website.
  11. Dean Karlan & Xavier Gine & Jonathan Morduch & Pamela Jakiela, 2006. "Microfinance Games," Working Papers 936, Economic Growth Center, Yale University.
  12. Dean S. Karlan, 2005. "Using Experimental Economics to Measure Social Capital And Predict Financial Decisions," Working Papers 909, Economic Growth Center, Yale University.
  13. David Masclet & Charles Noussair & Steven Tucker & Marie-Claire Villeval, 2003. "Monetary and non Monetary Punishment in the Voluntary Contributions Mechanism," Post-Print halshs-00175251, HAL.
  14. Carpenter, Jeffrey P. & Burks, Stephen V. & Verhoogen, Eric, 2004. "Comparing Students to Workers: The Effects of Social Framing on Behavior in Distribution Games," IZA Discussion Papers 1341, Institute for the Study of Labor (IZA).
  15. Carpenter, Jeffrey P. & Daniere, Amrita G. & Takahashi, Lois M., 2004. "Cooperation, trust, and social capital in Southeast Asian urban slums," Journal of Economic Behavior & Organization, Elsevier, vol. 55(4), pages 533-551, December.
  16. Cardenas, Juan Camilo & Carpenter, Jeffrey P., 2010. "Risk Attitudes and Well-Being in Latin America," IZA Discussion Papers 5279, Institute for the Study of Labor (IZA).
  17. David Masclet & Charles Noussair & Steven Tucker & Marie-Claire Villeval, 2001. "Monetary and Non-Monetary Punishment in the Voluntary Contributions Mechanism," Post-Print halshs-00151423, HAL.
  18. Alexander S. Kritikos & Denitsa Vigenina, 2005. "Key Factors of Joint-Liability Loan Contracts: An Empirical Analysis," Kyklos, Wiley Blackwell, vol. 58(2), pages 213-238, 04.
  19. Dean Karlan & Jonathan Morduch & Pamela Jakiela & Xavier Gine, 2006. "Microfinance games," Framed Field Experiments 00150, The Field Experiments Website.
  20. Hermes, Niels & Lensink, Robert & Mehrteab, Habteab T., 2005. "Peer Monitoring, Social Ties and Moral Hazard in Group Lending Programs: Evidence from Eritrea," World Development, Elsevier, vol. 33(1), pages 149-169, January.
  21. Gustavo A. Barboza & Humberto Barreto, 2006. "Learning By Association: Micro Credit In Chiapas, Mexico," Contemporary Economic Policy, Western Economic Association International, vol. 24(2), pages 316-331, 04.
  22. List, John A. & Rasul, Imran, 2011. "Field Experiments in Labor Economics," Handbook of Labor Economics, Elsevier.
  23. Burks, Stephen V. & Carpenter, Jeffrey P. & Götte, Lorenz & Rustichini, Aldo, 2008. "Cognitive Skills Explain Economic Preferences, Strategic Behavior, and Job Attachment," IZA Discussion Papers 3609, Institute for the Study of Labor (IZA).
  24. Armendariz de Aghion, Beatriz, 1999. "On the design of a credit agreement with peer monitoring," Journal of Development Economics, Elsevier, vol. 60(1), pages 79-104, October.
  25. Simtowe, Franklin & Zeller, Manfred, 2006. "Determinants of Moral Hazard in Microfinance: Empirical Evidence from Joint Liability Lending Programs in Malawi," MPRA Paper 461, University Library of Munich, Germany.
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