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Long-Term Relationships, Group lending and Peer Sanctioning in Microfinance: New Experimental Evidence

  • Simon Cornée

    (CREM CNRS UMR 6211, University of Rennes 1 and CERMi)

  • David Masclet

    (CREM CNRS UMR 6211, University of Rennes 1 and CIRANO (Montreal))

Microfinance is generally associated with high repayment rates. However, it is not clear whether the success of microfinance results only from the use of group lending or is also due to other mechanisms such as peer sanctioning or dynamic incentives induced by long-term relationships that are typically included in microfinance contracts. In this paper, we contribute to the existing literature by investigating the respective effects of each of these components of microfinance. This is done by running a laboratory experiment that allows us to isolate long-term relationships from the two other components (i.e. group lending and peer monitoring). Our experiment indicates that peer-lending dimension of microcredit in absence of peer-sanctioning mechanism is not sufficient to mitigate ex ante and ex post moral hazards. In sharp contrast, we find that individualized long-term credit relationships perform significantly better than group-lending mechanisms with or without peer sanctioning.

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Paper provided by Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS in its series Economics Working Paper Archive (University of Rennes 1 & University of Caen) with number 201316.

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Date of creation: May 2013
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Handle: RePEc:tut:cremwp:201316
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