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Repayment and Exclusion in a Microfinance Experiment

Author

Listed:
  • Jean-Marie Baland
  • Lata Gangadharan
  • Pushkar Maitra
  • Rohini Somanathan

Abstract

Microfinance groups often engage in a variety of collective activities not directly related to credit. Groups can sanction members who default on their loans by excluding them from these activities. Our experiment is designed to explore the effectiveness of such sanctions in improving repayment incentives. Groups of 10 members are provided with joint-liability loans for a specific investment project. If groups repay their loans, contributing members have the option of excluding other members and those that remain play a public goods game. By varying loan sizes across groups and allowing for heterogeneous gains from the public good within groups, we identify the role of incentives in repayment decisions. In line with theoretical predictions, groups with the largest repayment burdens have the highest default rates and within groups, individual decisions to contribute to loan repayment depend on gains from the public good game.

Suggested Citation

  • Jean-Marie Baland & Lata Gangadharan & Pushkar Maitra & Rohini Somanathan, 2013. "Repayment and Exclusion in a Microfinance Experiment," Monash Economics Working Papers 12-13, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2013-12
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    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2013/1213repaybalandgangmaitrasoman.pdf
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    Cited by:

    1. Pilar López-Sánchez & Elena Urquía-Grande & Cristina Campo & Andrés L. Cancer, 2022. "Delving into the Determinants of Default Risk in Savings Groups: Empirical Evidence from Ecuador," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 34(6), pages 2625-2650, December.
    2. Gabriele Camera & Lukas Hohl & Rolf Weder, 2023. "Inequality as a barrier to economic integration? An experiment," Experimental Economics, Springer;Economic Science Association, vol. 26(2), pages 383-411, April.
    3. Muhammad Saeed Iqbal & Sofi Mohd Fikri, 2025. "Resilience in Islamic Microfinance: Examining Women, Organizations, and Agricultural Consumers’ Impact on Credit Risk," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 16(5), pages 16996-17018, November.
    4. Sugato Chakravarty & S. M. Zahid Iqbal & Abu Zafar M. Shahriar, 2013. "Are Women “Naturally” Better Credit Risks in Microcredit? Evidence from Field Experiments in Patriarchal and Matrilineal Societies in Bangladesh," Working Papers 1019, Purdue University, Department of Consumer Sciences.
    5. Cornée, Simon & Masclet, David, 2022. "Long-term relationships, group lending, and peer monitoring in microfinance: Experimental evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 100(C).
    6. Astrid Dannenberg & Corina Haita-Falah & Sonja Zitzelsberger, 2020. "Voting on the threat of exclusion in a public goods experiment," Experimental Economics, Springer;Economic Science Association, vol. 23(1), pages 84-109, March.
    7. Susmita Baulia, 2017. "Take-up of joint and individual liability loans: an analysis with laboratory experiments," Discussion Papers 117, Aboa Centre for Economics.
    8. Alexandra Baier & Loukas Balafoutas & Tarek Jaber-Lopez, 2023. "Ostracism and theft in heterogeneous groups," Experimental Economics, Springer;Economic Science Association, vol. 26(1), pages 193-222, March.
    9. Mohamed, Toka S. & Elgammal, Mohammed M., 2023. "Credit risk in Islamic microfinance institutions: The role of women, groups, and rural borrowers," Emerging Markets Review, Elsevier, vol. 54(C).
    10. Qianling Wang & Zhigang Chen & Li Gui, 2025. "The analysis of multidimensional poverty reduction effects of dual financial participation: evidence from rural household in China," Humanities and Social Sciences Communications, Palgrave Macmillan, vol. 12(1), pages 1-19, December.
    11. Baulia, Susmita, 2019. "Take-up of joint and individual liability loans: An analysis with laboratory experiment," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 82(C).
    12. Samanwita Mishra & Chandan Kumar Sahoo, 2025. "Unveiling the potential of community financing for entrepreneurs: A systematic review and research agenda," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 96(3), pages 635-664, September.

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    Keywords

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    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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