Group Versus Individual Liability: A Field Experiment in the Philippines

Dean Karlan and Xavier Gine

No 111, Working Papers from Center for Global Development

Abstract: This working paper by CGD non-resident fellow Dean Karlan explores whether group liability in lending practices improves lender's overall profitability and the poor's access to financial markets. Group liability is a common microcredit lending mechanism that makes a group, rather than an individual recipient, responsible for repayment. It claims to improve repayment rates by providing incentives for peer's to screen, monitor and enforce each other's loans. But some argue that group liability actually discourages good clients from borrowing by creating tension among group members and causing dropouts, jeopardizing growth and sustainability. Also, bad clients can "free ride" off of good clients causing default rates to rise. In this paper, Karlan and his co-authors discuss the results of a field experiment at a bank in the Philippines, where they randomly reassigned half of the existing group liability centers as individual liability centers. They find that converting group liability to individual liability, while keeping aspects of group lending like weekly repayments and common meeting place, does not affect the repayment rate, and actually attracts new clients. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).

Keywords: group liability; lending practices; financial markets; repayment rates; free ride; Philippines (search for similar items in EconPapers)
JEL-codes: D71 D81 G10 G21 M20 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2007-01
New Economics Papers: this item is included in nep-dev, nep-exp and nep-mfd
References: Add references at CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.cgdev.org/content/publications/detail/12327

Related works:
Working Paper: Group versus Individual Liability: A Field Experiment in the Philippines (2007)
Working Paper: Group versus Individual Liability: A Field Experiment in the Philippines (2006)
Working Paper: Group versus Individual Liability: A Field Experiment in the Philippines (2006)
Working Paper: Group versus individual liability: A field experiment in the philippines (2006)
Working Paper: Group versus individual liability: a field experiment in the Philippines (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:cgd:wpaper:111

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