Microfinance games

Xavier Giné*, Pamela Jakiela, Dean Karlan, Jonathan Morduch

*Corresponding author for this work

Research output: Contribution to journalArticle

73 Scopus citations

Abstract

Microfinance banks use group-based lending contracts to strengthen borrowers' incentives for diligence, but the contracts are vulnerable to free-riding and collusion. We systematically unpack microfnance mechanisms through ten experimental games played in an experimental economics laboratory in urban Peru. Risk-taking broadly conforms to theoretical predictions, with dynamic incentives strongly reducing risk-taking even without group-based mechanisms. Group lending increases risk-taking, especially for risk-averse borrowers, but this is moderated when borrowers form their own groups. Group contracts beneft borrowers by creating implicit insurance against investment losses, but the costs are borne by other borrowers, especially the most risk averse.

Original languageEnglish (US)
Pages (from-to)60-95
Number of pages36
JournalAmerican Economic Journal: Applied Economics
Volume2
Issue number3
DOIs
StatePublished - Jul 2010

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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