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The Dynamics of Cooperation in Group Lending - A Microfinance Experiment

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  • Peter Werner

Abstract

We investigate the dynamics of borrower behavior in a microfinance experiment in which subjects are jointly responsible for credit repayment. Although cooperation levels are generally high, moral hazard problems persist among borrowers. Moreover, the path dependency of decisions mitigates the insurance effect of joint liability. We compare two conversion mechanisms from joint to individual liability. First, an active choice of the joint liability contract does not systematically increase cooperation. Second, conversion based on repayment success tends to have a detrimental impact on cooperation among the remaining joint liability borrowers.

Suggested Citation

  • Peter Werner, 2010. "The Dynamics of Cooperation in Group Lending - A Microfinance Experiment," Working Paper Series in Economics 49, University of Cologne, Department of Economics.
  • Handle: RePEc:kls:series:0049
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    References listed on IDEAS

    as
    1. Van Tassel, Eric, 1999. "Group lending under asymmetric information," Journal of Development Economics, Elsevier, pages 3-25.
    2. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, pages 27-50.
    3. Fischbacher, Urs & Gachter, Simon & Fehr, Ernst, 2001. "Are people conditionally cooperative? Evidence from a public goods experiment," Economics Letters, Elsevier, vol. 71(3), pages 397-404, June.
    4. 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.
    5. Xavier Giné & Pamela Jakiela & Dean Karlan & Jonathan Morduch, 2010. "Microfinance Games," American Economic Journal: Applied Economics, American Economic Association, pages 60-95.
    6. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, pages 1-18.
    7. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, pages 1-18.
    8. Grimm, Veronika & Mengel, Friederike, 2009. "Cooperation in viscous populations--Experimental evidence," Games and Economic Behavior, Elsevier, vol. 66(1), pages 202-220, May.
    9. Gunnthorsdottir, Anna & Houser, Daniel & McCabe, Kevin, 2007. "Disposition, history and contributions in public goods experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 62(2), pages 304-315, February.
    10. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
    11. Bohnet, Iris & Kubler, Dorothea, 2005. "Compensating the cooperators: is sorting in the prisoner's dilemma possible?," Journal of Economic Behavior & Organization, Elsevier, vol. 56(1), pages 61-76, January.
    12. Armendariz de Aghion, Beatriz, 1999. "On the design of a credit agreement with peer monitoring," Journal of Development Economics, Elsevier, pages 79-104.
    13. Abhijit V. Banerjee & Timothy Besley & Timothy W. Guinnane, 1994. "Thy Neighbor's Keeper: The Design of a Credit Cooperative with Theory and a Test," The Quarterly Journal of Economics, Oxford University Press, pages 491-515.
    14. Konrad, Kai A. & Kovenock, Dan, 2009. "The alliance formation puzzle and capacity constraints," Economics Letters, Elsevier, pages 84-86.
    15. 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.
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    Cited by:

    1. Ralph-C Bayer & Sujiphong Shatragom, 2013. "Cost Efficient Joint Liability Lending," School of Economics Working Papers 2013-23, University of Adelaide, School of Economics.

    More about this item

    Keywords

    microfinance; group lending; individual lending; social preferences;

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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