Microfinance Games

Abstract

Microfinance banks use group-based lending contracts to strengthen borrowers' incentives for diligence, but the contracts are vulnerable to free-riding and collusion. We systematically unpack microfinance mechanisms through ten experimental games played in an experimental economics laboratory in urban Peru. Risk-taking broadly conforms to theoretical predictions, with dynamic incentives strongly reducing risk-taking even without group-based mechanisms. Group lending increases risk-taking, especially for risk-averse borrowers, but this is moderated when borrowers form their own groups. Group contracts benefit borrowers by creating implicit insurance against investment losses, but the costs are borne by other borrowers, especially the most risk averse. (JEL D82, G21, G31, O16)

Moral hazard and peer monitoring in a laboratory microfinance experiment

“…We report the results from a laboratory experiment of group lending in the presence of moral hazard and (costly) peer monitoring. 2 We find 1 As of 2007, microfinance institutions were serving around 150 million people around the world (Gine et al (2010)). The 2006 Nobel Prize for Peace to microfinance pioneer Muhammed Yunus also put the success of microfinance in the world spotlight.…”

Three Risk-elicitation Methods in the Field: Evidence from Rural Senegal

“…Some examples include Ashraf (2009), Attanasio et al (2011);Carter (2011), Delavande et al (2011), Giné et al (2010), Harrison et al (2010), and . 1 The risk attitude of the population is one characteristic with clear importance for policy recommendations.…”

Microfinance Services and Economic Growth of Households in Lubumbashi in the Democratic Republic of Congo

“…Armendariz and Morduch (2005) and Giné, Jakiela, Karlan, and Morduch (2010) stated that in many countries, microfinance has become a revolutionary way to reduce poverty due to the fact that this type of organization and the way that it operates are better designed to face information problems. In order to explain the success of microfinance in providing credit to the poor, a large number of theoretical works use the principal/agent theory to demonstrate that microfinance contracts lending to joint-liable groups to solve the problems of asymmetric information in the credit market.…”