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

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  • Simon Cornée
  • David Masclet

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.

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  • Simon Cornée & David Masclet, 2013. "Long-Term Relationships, Group lending and Peer Sanctioning in Microfinance: New Experimental Evidence," Working Papers CEB 13-026, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:sol:wpaper:2013/143974
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    Cited by:

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    2. Shahid Razzaque, 2019. "Choice of Microfinance Contracts and Repayment Rates under Individual Lending: An Artefactual Field Experiment from Pakistan," PIDE-Working Papers 2019:166, Pakistan Institute of Development Economics.

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    More about this item

    Keywords

    Experimental Economics; Credit Market; Microfinance; Peer Lending;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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