Moral Hazard, Peer Monitoring, and Microcredit: Field Experimental Evidence from Paraguay

32 Pages Posted: 2 Jul 2010

See all articles by Jeffrey P. Carpenter

Jeffrey P. Carpenter

Middlebury College - Department of Economics; IZA Institute of Labor Economics

Tyler Williams

Federal Reserve Bank of Boston

Date Written: June 28, 2010

Abstract

Given the substantial amount of resources currently invested in microcredit programs, it is more important than ever to accurately assess the extent to which peer monitoring by borrowers faced with group liability contracts actually reduces moral hazard. We conduct a field experiment with women about to enter a group loan program in Paraguay and then gather administrative data on the members' repayment behavior in the six-month period following the experiment. In addition to the experiment which is designed to measure individual propensities to monitor under incentives similar to group liability, we collect a variety of the other potential correlates of borrowing behavior and repayment. Controlling for other factors, we find a very strong causal relationship between the monitoring propensity of one's loan group and repayment. Our lowest estimate suggests that borrowers in groups with above median monitoring are 36 percent less likely to have a problem repaying their portion of the loan. Besides confirming a number of previous results, we also find some evidence that risk preferences, social preferences, and cognitive skills affect repayment.

JEL Classification: C93, D03, D14, G21, O16, O54

Suggested Citation

Carpenter, Jeffrey P. and Williams, Tyler, Moral Hazard, Peer Monitoring, and Microcredit: Field Experimental Evidence from Paraguay (June 28, 2010). FRB of Boston Working Paper No. 10-6. Available at SSRN: https://ssrn.com/abstract=1633930 or http://dx.doi.org/10.2139/ssrn.1633930

Jeffrey P. Carpenter (Contact Author)

Middlebury College - Department of Economics ( email )

Munroe Hall
Middlebury, VT 05753
United States
802-443-3241 (Phone)
802-443-2084 (Fax)

HOME PAGE: http://community.middlebury.edu/~jcarpent/index.ht

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Tyler Williams

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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