Referrals: Peer Screening and Enforcement in a Consumer Credit Field Experiment

Abstract

Empirical evidence on peer intermediation lags behind many years of lending practice and a large body of theory in which lenders use peers to mitigate adverse selection and moral hazard.Using a simple referral incentive mechanism under individual liability, we develop and implement a two-stage field experiment that permits separate identification of peer screening and enforcement effects. We allow for borrower heterogeneity in both ex-ante repayment type and ex-post susceptibility to social pressure. Our key contribution is how we deal with the interaction between these two sources of asymmetric information. Our method allows us to identify selection on the likelihood of repayment, selection on the susceptibility to social pressure, and loan enforcement. We estimate peer effects on loan repayment in our setting, and find no evidence of screening (albeit with an imprecisely estimated zero) and large effects on enforcement.We then discuss the potential utility and portability of the methodological innovation, for both science and for practice. JEL Codes:

Consumer Credit: Too Much or Too Little (or Just Right)?

“…Another type of test seeks to separately identify one or more of three varieties. Adams et al (2009), Einav et al (2012, and Dobbie and Skiba (2013) find evidence of substantial adverse selection in two U.S. markets, and Karlan and Zinman (2009) and Bryan, Karlan, and Zinman (2013) find evidence of substantial moral hazard in a South African market. Bryan et al also develops the only test I have seen for selection on moral hazard in a credit market, and find no evidence of it, although the sample is small and hence the estimate is imprecise.…”

Social Networks, Reputation, and Commitment: Evidence From a Savings Monitors Experiment

“…Individuals may be affected by the actions of their peers through a variety of channels. Using the example of group savings, the literature has shown that peer effects operate through channels such as (a) learning how to use financial products; (b) reminders; (c) posting a bond; or (d) reference‐dependent preferences (“keeping up with the Joneses”) (see Jack and Suri (), Cai, de Janvry, and Sadoulet (), Bryan, Karlan, and Zinman (), Kast and Pomeranz (), Beaman, Karlan, and Thuysbaert (), Beshears, Choi, Laibson, Madrian, and Milkman ( ), Munshi (), Karlan, McConnell, Mullainathan, and Zinman ( ), Bursztyn, Ederer, Ferman, and Yuchtman ( ), and Banerjee, Chandrasekhar, Duflo, and Jackson ( )). However, less has been written on whether peer effects may arise from individuals wanting to impress others through their actions.…”

“…Third, we desire a context that is naturalistic. Savings is an obvious application in which to study public commitments, as many of the informal financial products commonly observed in developing countries (and in the study villages) and discussed above incorporate groups of individuals from the same social network and rely on mechanisms that are likely to include mutual monitoring/observation ( Besley and Coate (), Beaman, Karlan, and Thuysbaert (), Besley, Coate, and Loury (), Karlan (), Giné and Karlan (2014 ), Bryan, Karlan, and Zinman (), and Breza ()). ,…”

Why the Referential Treatment: Evidence from Field Experiments on Referrals

“…(e.g., Bryan et al, 2014). 4 While team production has not been emphasized as an explanation for hiring referrals in the economics literature, general research on team production implies it may be an important bene…t of referrals.…”