Identification Strategy: A Field Experiment on Dynamic Incentives in Rural Credit Markets
55 Pages Posted: 2 Jul 2010
There are 2 versions of this paper
Identification Strategy: A Field Experiment on Dynamic Incentives in Rural Credit Markets
Date Written: June 1, 2010
Abstract
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).
Keywords: credit, microfinance, adverse selection, moral hazard, enforcement
JEL Classification: O12, O16
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Using Experimental Economics to Measure Social Capital and Predict Financial Decisions
-
Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment
By Dean S. Karlan and Jonathan Zinman
-
Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment
By Dean S. Karlan and Jonathan Zinman