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Is Group Lending A Good Enforcement Scheme for Achieving High Repayment Rates?: Evidence from Field Experiments in Vietnam

Hisaki Kono ()

No 61, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: Microfinance institutions employ various kinds of incentive schemes but estimating the effect of each scheme is not easy due to endogeneity bias. We conducted field experiments in Vietnam to capture the role of joint liability, monitoring, cross-reporting, social sanctions, communication and group formation in borrowers’ repayment behavior. We find that joint liability contracts cause serious free-riding problems, inducing strategic default and lowering repayment rates. When group members observe each others’ investment returns, participants are more likely to choose strategic default. Even after introducing a cross-reporting system and/or penalties among borrowers, the default rates and the ratios of participants who chose strategic default under joint liability are still higher than those under individual lending. We also find that joint liability lending often failed to induce mutual insurance among borrowers. Those who had been helped or who had repaid a little in the previous round were more likely to default strategically and repay a little again in the current round and those who paid large amounts were always the same individuals.

Keywords: Microfinance; Joint liability; Free-riding; Vietnam; マイクロファイナンス; ベトナム (search for similar items in EconPapers)
JEL-codes: F15 O14 O30 (search for similar items in EconPapers)
Date: 2006-05-01
New Economics Papers: this item is included in nep-dev, nep-exp, nep-ias and nep-mfd
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Published in IDE Discussion Paper = IDE Discussion Paper, No. 61. 2006-05-01

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