Identification Strategy: A Field Experiment on Dynamic Incentives in Rural Credit Markets
World Bank - Development Economics Research Group and Bureau for Research and Economic Analysis of Development (BREAD)
University of Maryland, Department of Economics
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
June 1, 2010
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).
Number of Pages in PDF File: 55
Keywords: credit, microfinance, adverse selection, moral hazard, enforcement
JEL Classification: O12, O16working papers series
Date posted: July 2, 2010
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