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

Simon Cornee and David Masclet ()

Economics Working Paper Archive (University of Rennes & University of Caen) from Center for Research in Economics and Management (CREM), University of Rennes, University of Caen and CNRS

Abstract: 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.

Keywords: Experimental Economics; Credit Market; Microfinance; Peer Lending (search for similar items in EconPapers)
JEL-codes: C72 C91 G20 G21 (search for similar items in EconPapers)
Date: 2013-05
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-gth and nep-mfd
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Long-Term Relationships, Group lending and Peer Sanctioning in Microfinance: New Experimental Evidence (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:tut:cremwp:201316

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