Moral Hazard and Peer Monitoring in a Laboratory Microfinance Experiment

Timothy Cason, Lata Gangadharan () and Pushkar Maitra

Purdue University Economics Working Papers from Purdue University, Department of Economics

Abstract: Most problems with formal sector credit lending to the poor in developing countries can be attributed to the lack of information and inadequate collateral. One common feature of successful credit mechanisms is group-lending, where the loan is advanced to an individual if he/she is a part of a group and members of the borrowing group can monitor each other. Since group members have better information about each other compared to lenders, peer monitoring is often less expensive than lender monitoring. Theoretically this leads to greater monitoring and greater rates of loan repayments. This paper reports the results from a laboratory experiment of group lending in the presence of moral hazard and (costly) peer monitoring. We compare peer monitoring treatments when credit is provided to members of the group sequentially and simultaneously, and individual lending with lender monitoring. The results depend on the relative cost of monitoring by the peer vis- -vis the lender. In the more typical case where the cost of peer monitoring is lower than the cost of lender monitoring, our results suggest that peer monitoring results in higher loan frequencies, higher monitoring and higher repayment rates compared to lender monitoring. In the absence of monitoring cost differences, performance is mostly similar across group and individual lending schemes, although loan frequencies and monitoring rates are sometimes modestly greater with group lending. Within group lending, although the dynamic incentives provided by sequential leading generate the greatest equilibrium surplus, simultaneous group leading provides equivalent empirical performance.

Keywords: Group Lending; Monitoring; Moral Hazard; Laboratory Experiment; Loans; Development (search for similar items in EconPapers)
JEL-codes: C92 G21 O2 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2008-03
New Economics Papers: this item is included in nep-cbe, nep-cta, nep-dev, nep-exp, nep-mfd and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
https://business.purdue.edu/research/Working-papers-series/2008/1208.pdf (application/pdf)

Related works:
Journal Article: Moral hazard and peer monitoring in a laboratory microfinance experiment (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pur:prukra:1208

Access Statistics for this paper

More papers in Purdue University Economics Working Papers from Purdue University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Business PHD ().