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Microfinance games

  • Gine, Xavier
  • Jakiela, Pamela
  • Karlan, Dean
  • Morduch, Jonathan

Microfinance has been heralded as an effective way to address imperfections in credit markets. But from a theoretical perspective, the success of microfinance contracts has puzzling elements. In particular, the group-based mechanisms often employed are vulnerable to free-riding and collusion, although they can also reduce moral hazard and improve selection. The authors created an experimental economics laboratory in a large urban market in Lima, Peru and over seven months conducted 11 different games that allow them to unpack microfinance mechanisms in a systematic way. They find that risk-taking broadly conforms to predicted patterns, but that behavior is safer than optimal. The results help to explain why pioneering microfinance institutions have been moving away from group-based contracts.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3959.

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Date of creation: 01 Jul 2006
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Handle: RePEc:wbk:wbrwps:3959
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