How Important Are Endogenous Peer Effects in Group Lending? Estimating a Static Game of Incomplete Information

37 Pages Posted: 15 May 2009 Last revised: 23 Feb 2011

See all articles by Shanjun Li

Shanjun Li

Cornell University - School of Applied Economics and Management

Yanyan Liu

World Bank

Klaus Deininger

World Bank - Development Economics Group (DEC); World Bank - Development Research Group (DECRG)

Date Written: May 10, 2009

Abstract

We quantify the importance of endogenous peer effects in group lending programs by estimating a static game of incomplete information. Endogenous peer effects describe how one's behavior is affected by the behavior of her peers. Using a rich data set from a group lending program in India, our empirical analysis presents a robust finding of large peer effects. The benchmark model suggests that the probability of a member making a full repayment would be 11 percentage points higher if all the fellow members were to make full repayment compared with a scenario in which none of the other members repay in full. We find that peer effects would be overestimated without controlling for unobserved group heterogeneity and that inconsistencies exist in the estimated effects of other variables without modeling peer effects and unobserved heterogeneity.

Keywords: peer effects, group lending, static game of incomplete information

Suggested Citation

Li, Shanjun and Liu, Yanyan and Deininger, Klaus, How Important Are Endogenous Peer Effects in Group Lending? Estimating a Static Game of Incomplete Information (May 10, 2009). Available at SSRN: https://ssrn.com/abstract=1402286 or http://dx.doi.org/10.2139/ssrn.1402286

Shanjun Li (Contact Author)

Cornell University - School of Applied Economics and Management ( email )

248 Warren Hall
Ithaca, NY 14853
United States

Yanyan Liu

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Klaus Deininger

World Bank - Development Economics Group (DEC) ( email )

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

HOME PAGE: http://econ.worldbank.org/staff/kdeininger

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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