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Repayment and Exclusion in a Microfinance Experiment

Listed author(s):
  • Jean-Marie Baland
  • Lata Gangadharan
  • Pushkar Maitra
  • Rohini Somanathan

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.

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File URL: http://www.buseco.monash.edu.au/eco/research/papers/2013/1213repaybalandgangmaitrasoman.pdf
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Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 12-13.

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Length: 24 pages
Date of creation: May 2013
Handle: RePEc:mos:moswps:2013-12
Contact details of provider: Postal:
Department of Economics, Monash University, Victoria 3800, Australia

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Fax: +61-3-9905-5476
Web page: http://business.monash.edu/economics
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