Group Versus Individual Liability: A Field Experiment from the Philippines

39 Pages Posted: 14 Jul 2006

See all articles by Xavier Giné

Xavier Giné

World Bank - Development Research Group (DECRG)

Dean S. Karlan

Yale University; Northwestern University - Kellogg School of Management; Innovations for Poverty Action; Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab (J-PAL); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: July 2006

Abstract

Group liability is often portrayed as the key innovation that led to the explosion of the microcredit movement, which started with the Grameen Bank in the 1970s and continues on today with hundreds of institutions around the world. Group lending claims to improve repayment rates and lower transaction costs when lending to the poor by providing incentives for peers to screen, monitor and enforce each other's loans. However, some argue that group liability creates excessive pressure and discourages good clients from borrowing, jeopardizing both growth and sustainability. Therefore, it remains unclear whether group liability improves the lender's overall profitability and the poor's access to financial markets. We worked with a bank in the Philippines to conduct a field experiment to examine these issues. We randomly assigned half of the 169 pre-existing group liability "centers" of approximately twenty women to individual-liability centers (treatment) and kept the other half as-is with group liability (control). We find that the conversion to individual liability does not affect the repayment rate, and leads to higher growth in center size by attracting new clients.

Keywords: microfinance, group liability, joint liability, social capital, micro-enterprises, informal economies

JEL Classification: C93, D71, D82, D91, G21, O12, O16, O17

Suggested Citation

Gine, Xavier and Karlan, Dean S. and Karlan, Dean S., Group Versus Individual Liability: A Field Experiment from the Philippines (July 2006). Yale University Economic Growth Center Discussion Paper No. 940, Available at SSRN: https://ssrn.com/abstract=917148

Xavier Gine

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
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HOME PAGE: https://sites.google.com/site/decrgxaviergine/

Dean S. Karlan (Contact Author)

Yale University ( email )

Box 208269
New Haven, CT 06520-8269
United States

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Innovations for Poverty Action ( email )

1731 Connecticut Ave, 4th floor
New Haven, CT 20009
United States

Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab (J-PAL) ( email )

E60-246
77 Massachusetts Avenue
Cambridge, MA 02139
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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