Identification Strategy: A Field Experiment on Dynamic Incentives in Rural Credit Markets

55 Pages Posted: 2 Jul 2010

See all articles by Xavier Giné

Xavier Giné

World Bank - Development Research Group (DECRG)

Jessica Goldberg

University of Maryland, Department of Economics

Dean Yang

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy; National Bureau of Economic Research (NBER); University of Michigan at Ann Arbor - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2010

Abstract

How do borrowers respond to improvements in a lender’s ability to punish defaulters? We report the results of a randomized field experiment in rural Malawi that examines the impact of fingerprinting borrowers in a context where a unique identification system is absent. Fingerprinting allows the lender to more effectively use dynamic repayment incentives: withholding future loans from past defaulters while rewarding good borrowers with better loan terms. Consistent with a simple model of borrower heterogeneity and information asymmetries, fingerprinting led to substantially higher repayment rates for borrowers with the highest ex ante default risk, but had no effect for the rest of borrowers. The change in repayment rates is driven by reductions in adverse selection (smaller loan sizes) and lower moral hazard (e.g., less diversion of loan-financed fertilizer from its intended use on the cash crop).

Keywords: credit, microfinance, adverse selection, moral hazard, enforcement

JEL Classification: O12, O16

Suggested Citation

Gine, Xavier and Goldberg, Jessica and Yang, Dean and Yang, Dean, Identification Strategy: A Field Experiment on Dynamic Incentives in Rural Credit Markets (June 1, 2010). Available at SSRN: https://ssrn.com/abstract=1633517 or http://dx.doi.org/10.2139/ssrn.1633517

Xavier Gine

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
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Washington, DC 20433
United States

HOME PAGE: https://sites.google.com/site/decrgxaviergine/

Jessica Goldberg

University of Maryland, Department of Economics ( email )

College Park, MD 20742
United States

Dean Yang (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy ( email )

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734-764-6158 (Phone)

HOME PAGE: http://www.umich.edu/~deanyang/

University of Michigan at Ann Arbor - Department of Economics

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

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