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.
Unfair Incentives: A Behavioral Note on Sharecropping (with Niels Kemper (KfW Development Bank) and Heiner Schumacher (KU Leuven), Economics of Transition, (2018) 26(2) 303-331 [link to journal website][Web Appendix]
Abstract: We conducted a lab-in-the-field experiment with real-life tenants in Ethiopia to test the incentive eff.ects of fixed wage, sharecropping, fixed rent, and ownership contracts. The experimental task resembles a common process in agricultural production. The sharecropping contract is a piece rate scheme framed as a profit sharing agreement. Sharecropping output was about 12 percent smaller than the fixed rent output. Surprisingly, it is statistically indistinguishable from the fixed wage output, despite substantial piece rates. This eff.ect is driven by real-life sharecroppers. Their sharecropping output was smaller than that of non-sharecroppers, specially in a region where a controversial land reform took place. We argue that our subjects dislike sharecropping contracts because of the unfair profit sharing and the disputed allocation of land. Fairness concerns therefore may be another impediment to e.ciency under the sharecropping contract.
Flexible Microcredit: Effects on Loan Repayment and Social Pressure >>PDF
with Anett John (University of Birmingham) and Lisa Spantig (University of Essex), CESifo Working Paper No. 8322
Abstract: Flexible repayment schedules allow borrowers to invest in profitable yet risky projects, but practitioners fear they erode repayment morale. We study repayment choices in rigid and flexible loan contracts that allow discretion in repayment timing. To separate strategic repayment choices from repayment capacity given income shocks, we conduct a lab-in-the-field experiment with microcredit borrowers in the Philippines. Our design allows us to observe social pressure, which is considered both central to group lending, and excessive in practice. In our rigid benchmark contract, repayment is much higher than predicted under simple payoff maximization. Flexibility reduces high social pressure, but comes at the cost of reduced loan repayment. We present theoretical and empirical evidence consistent with a strong social norm for repayment, which is weakened by the introduction of flexibility. Our results imply that cooperative behavior determined by social norms may erode if the applicability of these norms is not straightforward.
Financial Market Responses to a Natural Disaster: Evidence from Local Credit Networks and the Indian Ocean Tsunami >>PDF
with Stefan Klonner (University of Heidelberg), CESifo Working Paper No. 7354
Abstract: Conventional wisdom in economics holds that traditional credit and insurance networks are inapt for insuring against covariate risks such as natural hazards. We challenge this claim by examining changes in financial allocations in Rotating Savings and Credit Associations (Roscas), a popular group-based financial institution world-wide, in the aftermath of the 2004 Indian Ocean tsunami. With financial data from locations along the South Indian coast that were affected by this natural disaster to different extents, we estimate the causal effect of this devastating economic shock on financial flows between occupational groups, the price of credit and other loan characteristics. We find that the supply of funds in these local credit networks remained remarkably stable, while demand by self-employed members increased significantly. In response, substantial funds were channeled from wage-employed members and commercial investors to small and medium-scale entrepreneurs. We conclude that traditional non-market financial institutions may be more important for coping with covariate risks in low-income environments than commonly assumed.
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.
Willingness to pay for microinsurance and flexibility: Evidence from an agricultural investment lab-in-the-field experiment in Senegal >>Policy Brief
with Vianney Dequiedt (CERDI - Université d’Auvergne)
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.
Work in progress
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 (Florida International University))
Contract design and demand for credit in microfinance - Evidence from lab-in-the-field and field experiments in rural Bangladesh (with Abu Shonchoy (Florida International University))
The effects of information sharing on moral hazard in credit markets - Evidence from a randomized evaluation in the Philippines (with Matthias Fahn (Johannes Kepler University Linz) and Lisa Spantig (LMU Munich))