Reports
Discussion Papers
No.061 Is Group Lending A Good Enforcement Scheme for Achieving High Repayment Rates?: Evidence from Field Experiments in Vietnam
by KONO Hisaki
May 2006
ABSTRACT
Microfinance
institutions
employ
various
kinds
of
incentive
schemes
but
estimating
the
effect
of
each
scheme
is
not
easy
due
to
endogeneity
bias.
We
conducted
field
experiments
in
Vietnam
to
capture
the
role
of
joint
liability,
monitoring,
cross-reporting,
social
sanctions,
communication
and
group
formation
in
borrowers’
repayment
behavior.
We
find
that
joint
liability
contracts
cause
serious
free-riding
problems,
inducing
strategic
default
and
lowering
repayment
rates.
When
group
members
observe
each
others’
investment
returns,
participants
are
more
likely
to
choose
strategic
default.
Even
after
introducing
a
cross-reporting
system
and/or
penalties
among
borrowers,
the
default
rates
and
the
ratios
of
participants
who
chose
strategic
default
under
joint
liability
are
still
higher
than
those
under
individual
lending.
We
also
find
that
joint
liability
lending
often
failed
to
induce
mutual
insurance
among
borrowers.
Those
who
had
been
helped
or
who
had
repaid
a
little
in
the
previous
round
were
more
likely
to
default
strategically
and
repay
a
little
again
in
the
current
round
and
those
who
paid
large
amounts
were
always
the
same
individuals.
Keywords:
Microfinance,
joint
liability,
free-riding
JEL
classification:
F15,
O14,
O30
Please note that discussion papers are works in various stages of progress and most have not been edited and proofread and may contain errors of fact or judgment. Revised versions of these papers may subsequently appear in more formal publication series. The views expressed in this publication are those of the author(s). The IDE does not guarantee the accuracy of the data included and accepts no responsibility for any consequences arising from its use.