Pay, peek, punish? Repayment, information acquisition and punishment in a microcredit lab-in-the-field experiment, Journal of Development Economics, (2015) 117: 119 - 133 [link to journal website] [Web Appendix]
Abstract: Despite remarkable repayment rates in microcredit group lending, anecdotal evidence from the field suggests that there is excessive punishment among group members. To quantify excessive peer punishment, I conduct a lab-in-the-field experiment with actual microcredit borrowers in rural India. I design a repayment coordination game with strategic default and the possibility of acquiring information about a peer's investment return (peer peeking) and of sanctioning a peer (peer punishment). I observe loan repayment of over 90 percent and punishment of around 85 percent. Punishment is classified as excessive compared to a game-theoretically derived benchmark of zero punishment and a behaviorally-rooted benchmark of unjust punishment. This gives solid support to the anecdotal evidence and manifests the concern of excessive peer pressure in microcredit group lending. The most promising explanation is that borrowers have internalized the mission indoctrination of the microlender of what constitutes a good borrower, namely repaying loans and disciplining peers.
Do flexible repayment schedules improve the impact of microcredit? Evidence from a randomized evaluation in rural India >>PDF
Abstract: Microcredit institutions typically apply rigid and fixed repayment schedules when disbursing loans in order to reduce transaction costs, simplify procedures, and inculcate fiscal discipline for better repayment behavior. Microcredit clients, however, have neither smooth income nor singular moments in which to make lumpy investments throughout the year. This mismatch generates a cash flow disconnect and, given the presumed liquidity constraints of the typical microcredit client, a potential welfare loss. Using data from a randomized evaluation with dairy farmers in rural India, we test the impact of flexible microcredit repayment schedules relative to "normal" inflexible, fixed repayment schedules. We find limited improvement in investment, although higher production from milk, higher ability to absorb shocks rather than default on loans, and ultimately, higher income. On the cost-side, defaults do increase for the lender. Towards the end of the study, the microcredit market encountered crisis, with mass defaults, thus it is hard to generalize with respect to the default results. We conclude with caution, that we have shown suggestive evidence that a more flexible product design, one tailored to the needs of a dairy farmer, may be welfare enhancing for the dairy farmer. Further work is needed to both validate these results, and explore how to balance the tradeoff with default.
Does semi-formal credit help to cope with aggregate shocks? Evidence from Roscas and the Indian Ocean Tsunami >>PDF
with Stefan Klonner (University of Heidelberg)
Abstract: We analyze theoretically and empirically the effects of the December 2004 Indian Ocean tsunami on credit demand in bidding Rotating Savings and Credit Associations (Roscas) in South India. We combine financial data from a semi-formal intermediary with geophysical data on the local severity of the tsunami. Exploiting the financial institution's inelastic credit supply in the short-run, we estimate the extent to which the price of credit changed in response to this shock. Comparing branches affected and unaffected by the tsunami before and after the disaster, we find a significant increase in the interest rate by around five percent on average in the affected branches. Interest rates increased most dramatically in the first three months after the tsunami hit and decreased subsequently over the year 2005 suggesting that semi-formal credit and official aid appear to be substitutes as disaster coping mechanisms rather than complements. Despite the observed increase in credit demand as measured by prices, the pattern of change in auction outcomes suggests that the tsunami resulted in a substantial reduction in the price elasticity of credit demand and hence smaller gains from trade among Rosca members with an aggregate shock compared to members who do not face any aggregate shock directly. Based on a complementary theoretical analysis, we conclude that the tsunami reduced the welfare generated by a Rosca and that bidding Roscas' potential for coping with aggregate shocks is limited.
Willingness to pay for microinsurance and flexibility: Evidence from an agricultural investment lab-in-the-field experiment in Senegal >>Policy Brief
Abstract: Agricultural households in developing countries pursue secondary income activities like livestock investments to enhance and smooth income. With agricultural income subject to shocks these investments may depend on the flexibility of the livestock market that can be limited in seasonal market environments.We test the relation between agricultural insurance and flexible investment opportunities using data from agricultural lab-in-the-fi eld experiments in rural Senegal. We fi nd that insurance increases investment in livestock and the substantial willingness to pay for insurance is responsive to the market environment: it is higher in non-flexible investment decisions indicating that insurance is more valuable in seasonal markets.
How do agricultural investment decisions change with the provision of rainfall microinsurance and savings? Evidence from a lab-in-the-field experiment in Senegal (with Vianney Dequiedt (CERDI - Université d’Auvergne))
Risk taking and crowding out in formal and informal insurance: Evidence from field lab experiments with aquaculture insurance in rural Vietnam
Group dynamics in microfinance - Leadership qualitites and group performance in rural Bangladesh (with Simeon Schudy (LMU Munich) and Abu Shonchoy (IDE-JETRO))
Contract design and demand for credit in microfinance - Evidence from lab-in-the-field and field experiments in rural Bangladesh (with Kazushi Takahashi (Sophia University), Abu Shonchoy (IDE-JETRO), Seiro Ito (IDE-JETRO), and Takashi Kurosaki (Hitotsubashi University))
Maintaining Repayment Discipline While Reducing Peer Pressure in Microfinance: Repayment Flexibility vs Social Insurance (with Anett John (CREST) and Lisa Spantig (LMU Munich))
The effects of information sharing on moral hazard in credit markets - Evidence from a randomized evaluation in the Philippines (with Matthias Fahn (LMU Munich) and Lisa Spantig (LMU Munich))