peer group formation in an adverse selection model this paper develops an adverse selection model where peer group systems are shown to trigger lower interest rates and remove credit rationing in the case where borrowers are uninformed about their potential partners and ex post state verification or auditing by banks is costly peer group formation reduces interest rates due to a collateral effect namely cross subsidisation amongst borrowers acts as collateral behind a loan by uncovering such a collateral effect this paper shows that peer group systems can be viewed as an effective risk pooling mechanism and thus enhance efficiency notjust in the full information set up a well known family of adverse selection models in the stiglitz and weiss 1981 tradition demonstrates that when banks are imperfectly informed about the riskiness of borrowers projects and therefore cannot discriminate against risky borrowers interest rates become inefficiently high and worthy borrowers are driven out of the credit market the extent of this problem is substantially magnified when borrowers do not have adequate collateral to secure a loan typically adverse selection combined with lack of collateral leads to prohibitively high interest rates poorly endowed individuals e g students immigrants the unemployed and a vast majority of poor individuals in developing countries often face such high rates and therefore cannot take advantage of profitable investment opportunities a peer group formation system represents a possible solution to the above problem under this system a bank lends to borrowers without collateral on condition that the borrowers organise themselves into groups and that participant borrowers within each group accept to take joint responsibility for a loan thus in addition to repaying their own share of the loan each group member must accept to repay the obligations of their defaulting peers otherwise the entire group is denied access to future refinancing systems of this kind have been very successful in practice they have generated lower interest rates for the rural poor in for example bangladesh the philippines bolivia and the state of arkansas in the united states moreover group lending has also been successfully implemented in large urban areas such in the cities of dhaka and chicago 1

network based social capital and individual loan repayment performance abstract this study analyses the effects of social capital on the repayment behaviour of borrowers in thailand in the context of agricultural economics an innovative data collection approach is used that originates from the field of sociology a personal network survey is carried out to measure the individual social capital of borrowers social capital variables are defined according to tie strength bonding bridging and social distance linking between the respondent and his her network member bonding social capital has a significant and positive influence on repayment performance however we find no significant evidence for an effect of bridging and linking social capital

group lending repayment incentives and social collateral abstract in this paper we investigate the impact on repayment rates of lending to groups which are made jointly liable for repayment this type of scheme especially in the guise of the grameen bank in bangladesh has received increasing attention we set up and analyze the repayment game which group lending gives rise to our analysis suggests that such schemes have both positive and negative effects on repayment rates the positive effect is that successful group members may have an incentive to repay the loans of group members whose projects have yielded insufficient return to make repayment worthwhile the negative effect arises when the whole group defaults even when some members would have repaid under individual lending we also show how group lending may harness social collateral which serves to mitigate its negative effect

market structure and borrower welfare in microfinance motivated by recent controversies surrounding the role of commercial lenders in microfinance we analyze borrower welfare under different market structures considering a benevolent non profit lender a for profit monopolist and a competitive credit market to understand the magnitude of the effects analyzed we simulate the model with parameters estimated from the mix market database our results suggest that market power can have severe implications for borrower welfare while despite possible information frictions competition typically delivers similar borrower welfare to non profit lending in addition for profit lenders are less likely to use joint liability than non profits

do public banks compete with private banks evidence from concentrated local markets in brazil we measure the competitive effect of public banks in concentrated local markets in brazil using branch location patterns we employ variation in market size number and identity of competitors to determine how the conduct of private banks is affected by the entry of a public bank we find that the market size needed to sustain a private bank branch is 35 larger if a private competitor is present and is not significantly affected by the presence of a public bank these results suggest that the presence of a public bank does not affect conduct of private banks

group credit a means to improve information transfer and loan repayment performance information asymmetries plague credit markets in developing countries leading to selective rationing and market segmentation with adverse income distributional consequences for small borrowers data collected from the finca group credit programme in costa rica were used to study the viability and cost effectiveness of group credit as a means to transmit information on borrower creditworthiness groups that screened members and used local information had lower delinquency rates than those that did not however less than half the groups had positive rates of economic return suggesting that group lending may improve information flow but is a cost sensitive institutional design

collective organizations versus relative performance contracts inequality risk sharing and moral hazard abstract this paper studies collective economic organizations that share risk and mitigate moral hazard and compares them with relative performance contracts information constrained optimal distributions of organizations and contracts are shown to be functions of the underlying primitives in particular the distribution of pareto weights and hence degree of inequality internal inequality of a potential local group is a force for collective organization that is multi agent organizations exist in order to extract wealth from some but not necessarily all members the group organization is also shown to be information constrained pareto optimal at extremes of local wealth relative to an outsider but the group organization is susceptible to both agents simultaneously deviating colluding against the outsider and this distortion makes an individualistic relative performance contract an attractive alternative more generally organizations contracts and allocations are jointly determined these implications could be distinguished in cross sectional time series data journal of economic literature classification numbers d70 d82

commercialization and the decline of joint liability microcredit abstract numerous authors point to a decline in joint liability microcredit and rise in individual liability lending but empirical evidence is lacking and there have been no rigorous analyses of possible causes we first show using the well known mix market dataset that there is evidence for a decline second we show theoretically that commercialization an increase in competition and a shift from non profit to for profit lending both of which are present in the data drives lenders to reduce their use of joint liability loan contracts third we test the model s key predictions and find support for them in the data

the effect of social capital on group loan repayment evidence from field experiments an important question to microfinance is the relevance of existing social capital in target communities to the performance of group lending this research presents evidence from field experiments in south africa and armenia in which subjects participate in trust and microfinance games we present evidence that personal trust between group members and social homogeneity are more important to group loan repayment than general societal trust or acquaintanceship between members we also find some evidence of reciprocity those who have been helped by other group members in the past are more likely to contribute in the future during the past decade exploring the role that social capital plays in economic behaviour has emerged as one of the most fascinating and fertile areas of economic research although precise definitions of social capital are notoriously difficult to pin down one of the early pioneers of the concept coleman 1988 defines social capital as social structure that facilitates certain actions of actors within the structure in his definition coleman specifically highlights the roles of mutual obligation expectations and trustworthiness social norms social sanctions and the transmission of information important studies in both developed and developing countries have analysed the impact of social capital in economic relationships putnam s celebrated work making democracy work civic traditions in modern italy 1993 and bowling alone america s declining social capital 1995 brought attention to the role that social capital plays in the development of the modern state udry s ground breaking 1994 work in nigeria illustrated how the social capital existing in traditional societies may allow for more efficient credit contracts than in developed economies with weaker social

replacement or additional purchase the impact of energy efficient appliances on household electricity saving under public pressures abstract this study examined the influence of additional and replacement purchases of energy efficient air conditioners on power savings we used a questionnaire survey and measured electricity use data from 339 japanese households collected from two city areas with different level of government requested electricity saving rates namely osaka 10 and matsuyama 5 the main findings of our study are as follows 1 households that purchased energy efficient air conditioners saved more electricity than those that did not 2 additional purchase households showed significant energy savings whereas replacement households did not the rebound effect may negate the energy saving effects of a new air conditioner 3 altruistic attitude is associated with more active participation in power saving 4 households in osaka saved more electricity than those in matsuyama probably because the government call to save electricity was more forceful

optional time of use prices for electricity econometric analysis of surplus and pareto impacts we estimate a model of time of use tou consumption and choice among optional tou tariffs in which the customer s choice among tariffs is based on its demand parameters which vary in the population we simulate the impact on consumption consumer surplus and profit of several optional tou rates that were offered experimentally in northern california the analysis suggests that with one possible exception the offering of these optional rates did not constitute a pareto improvement however total surplus excluding measurement costs is estimated to have risen by 1 41 to 2 55 per month per customer who chose the tou rates

microfinance spillovers a model of competition in informal credit markets with an application to indian villages despite widespread interest in the development of microfinance spillover effects on the non using population and redistributive issues remain largely unexplored i study a competition game between microfinance institutions mfis offering joint liability loans and moneylenders offering individual loans in presence of adverse selection i show that one unintended consequence of the entry of a microfinance sector in local credit markets can be to trigger an increase in the equilibrium informal interest rate because mfis tend to attract a disproportionately safe share of the borrower pool away from incumbent moneylenders the existence of such composition externality depends crucially on the size of the microfinance sector and the risk composition of the borrower pool the model predicts a non linearly increasing relationship between informal interest rates and mfis capacity in relatively safe credit markets and no relationship in risky villages i show evidence supporting these predictions using a first hand panel database that records all credit transactions over 8 years for a sample of about 1000 households living in indian villages with extensive space and time variation in the size of their microfinance sector

social connections and group banking lending to the poor is expensive due to high screening monitoring and enforcement costs group lending advocates believe lenders overcome this by harnessing social connections using data from finca peru i exploit a quasi random group formation process to find evidence of peers successfully monitoring and enforcing joint liability loans individuals with stronger social connections to their fellow group members i e either living closer or being of a similar culture have higher repayment and higher savings furthermore i observe direct evidence that relationships deteriorate after default and that through successful monitoring individuals know who to punish and who not to punish after default

using repayment data to test across models of joint liability lending theories rationalising joint liability lending are rich in implications for repayment rates we exploit this fact to test four diverse models we show that the models repayment implications do not always coincide for example higher correlation of output and borrowers ability to act cooperatively can raise or lower repayment depending on the model data from thai borrowing groups suggest that repayment is affected negatively by the joint liability rate ceteris paribus and social ties and positively by the strength of local sanctions and correlated returns further the relative fit of the adverse selection versus informal sanctions models varies by region

optimal partial group liability in microfinance lending abstract this paper develops a model of group borrowing that incorporates partial group liability where borrowers are penalized if their group members default but are not held responsible for the entirety of the failed loan the model illustrates a trade off of group liability lending while higher levels of group liability increase within group risk sharing if liability is too high borrowers strategically default the model predicts the existence of an optimal partial liability that maximizes transfers between group members while avoiding strategic default consistent with this prediction loan officers from a large microfinance institution in southern mexico who rarely allow one group member to repay while the other defaults achieve substantially lower default rates than loan officers for whom the practice is commonplace or for those for whom it has never occurred structural estimation using repayment data suggests that while a partial liability below full liability may reduce default rates the incidence of strategic default is rare

financial performance and outreach a global analysis of leading microbanks microfinance contracts have proven able to secure high rates of loan repayment in the face of limited liability and information asymmetries but high repayment rates have not translated easily into profits for most microbanks profitability though is at the heart of the promise that microfinance can deliver poverty reduction while not relying on ongoing subsidy the authors examine why this promise remains unmet for most institutions using a data set with unusually high quality financial information on 124 institutions in 49 countries they explore the patterns of profitability loan repayment and cost reduction the authors find that institutional design and orientation matter substantially lenders that do not use group based methods to overcome incentive problems experience weaker portfolio quality and lower profit rates when interest rates are raised substantially for these individual based lenders one key to achieving profitability is investing more heavily in staff costs a finding consistent with the economics of information but contrary to the conventional wisdom that profitability is largely a function of minimizing cost

post injury work outcomes revisited we use data for ontario workers with permanent impairments resulting from work related injuries to investigate the complex relationships among post injury work outcomes wages accommodations returning to the same or different employer and duration of work absence we argue the different aspects of post injury work experience may be jointly determined making post injury job characteristics endogenous in a duration model to explore the endogeneity issues we instrument post injury job variables from first stage equations and compare results from this informed model to a naive model that treats the variables as exogenous we find that returning to one s pre injury employer is associated with more favorable post injury work outcomes including higher wages greater likelihood of job accommodations and shorter durations of work absence relative to workers who change employers we also find substantial differences between the naive and informed models with accommodations having the predicted negative effect on duration only after we control for endogeneity

on the design of a credit agreement with peer monitoring this paper analyses the optimal design of collective credit agreements with joint responsibility first we demonstrate that these agreements can potentially induce peer monitoring reduce the incidence of strategic default and enhance the lender s ability to elicit debt repayments the resulting benefits in terms of extended credit should however be weighted against the higher monitoring effort that such agreements impose upon participant borrowers second we show that the relative benefits from peer monitoring are maximized when risks are positively correlated across borrowers and also when the size of the group is neither too small due to a joint responsibility cost sharing and commitment effects nor too large due to a free riding effect third we compare among different monitoring structures

voluntary electricity conservation of households after the great east japan earthquake a stated preference analysis abstract this paper examines the voluntary electricity saving awareness of households after the great east japan earthquake and the subsequent accident at the fukushima nuclear power station we conduct a conjoint analysis of consumer stated preferences for the settings of air conditioners refrigerators and the standby power of electrical appliances based on a web questionnaire survey administered in the areas supplied by the tokyo electric power company tepco and kansai electric power company kepco the main findings of this paper are as follows first we observe awareness of voluntary electricity conservation among the households in both the tepco and kepco areas after the disasters second awareness of voluntary power saving is higher in the tepco area which has been directly affected by the electric power shortages in comparison with the kepco area where there was no such direct impact third if power prices are to be further raised the consumer responses to the price changes would be small in both areas furthermore we show that the potential voluntary reduction in electric power consumption of a household in the tepco area is 26 more than that in the kepco area during the summer peak periods

village and larger economies the theory and measurement of the townsend thai project i have spent close to 20 years cataloging transactions between households in thai villages along with a research team just this past summer we documented a number of ways in which even relatively poor villages have money markets not dissimilar in some ways from new york financial markets with borrowing and repayment passing along links in credit chains in another project we have been looking at month by month school attendance grade level completion and graduation for children in these villages following them from birth to graduation the townsend thai project is a theory based data collection endeavor measuring and mapping village and larger economies into general equilibrium frameworks this paper reviews a number of findings implications applications and lessons learned and considers next steps

nonparametric regression techniques in economics this introduction to nonparametric regression emphasizes techniques that might be most accessible and useful to the applied economist the paper begins with a brief overview of the class of models under study and central theoretical issues such as the curse of dimensionality the bias variance trade off and rates of convergence the paper then focuses on kernel and nonparametric least squares estimation of the nonparametric regression model and optimal differencing estimation of the partial linear model constrained estimation and hypothesis testing is also discussed empirical examples include returns to scale in electricity distribution and hedonic pricing of housing attributes

thy neighbor s keeper the design of a credit cooperative with theory and a test economists now appreciate that resource allocation in less economically developed economies is profoundly influenced by non firm economic institutions however our theories of non firm institutions often suggest different answers to many questions including those of policy this paper illustrates a method for discriminating between alternative theories using data from german credit cooperatives from the nineteenth and early twentieth century germany we build a model of credit cooperatives designed to provide monitoring incentives and test this using nineteenth century data authors

group insurance and lending with endogenous social collateral abstract we construct a dynamic model of self enforcing insurance provision and lending to a community of borrowers who are connected by risk sharing arrangements that are themselves subject to enforcement problems as in kocherlakota 1996 we show that an outside lender offering constant consumption contracts can earn a higher profit if he conditions his repeated interactions with each borrower on the history of his interactions with all the group members a joint liability contract rather than on his history with that borrower only individual liability contracts this result holds even in the absence of informational asymmetries the observation driving it is that with individual liability contracts a joint welfare maximizing group may prefer to have one or more group members default on their contracts so that the group can consume a mix of outside funds and the defaulters stochastic income one contribution of our work is to give precise economic content to the concept of social collateral as the per agent surplus from group risk sharing over autarky the group can deter its members from defaulting on their contracts with the principal by threatening to reduce that surplus

contract structure risk sharing and investment choice few microfinance funded businesses grow beyond subsistence entrepreneurship this paper considers one possible explanation that the structure of existing microfinance contracts may discourage risky but high expected return investments to explore this possibility i develop a theory that unifies models of investment choice informal risk sharing and formal financial contracts i then test the predictions of this theory using a series of experiments with clients of a large microfinance institution in india the experiments confirm the theoretical predictions that joint liability creates two potential inefficiencies first borrowers free ride on their partners making risky investments without compensating partners for this risk second the addition of peer monitoring overcompensates leading to sharp reductions in risk taking and profitability equity like financing in which partners share both the benefits and risks of more profitable projects overcomes both of these inefficiencies and merits further testing in the field

joint liability lending and the peer selection effect we show that the joint liability lending contracts derived in ghatak 2000 violate an ex post incentive compatibility constraint which says that the amount of joint liability cannot exceed the amount of individual liability we derive and characterise optimal separating joint liability contracts incorporating this constraint

micro credit initiatives for equitable and sustainable development who pays abstract there is a growing acknowledgement that micro credit programs have potential for equitable and sustainable development however my anthropological research on the micro credit program of the grameen bank shows that bank workers are expected to increase disbursement of loans among their members and press for high recovery rates to earn profit necessary for economic viability of the institution to ensure timely repayment in the loan centers bank workers and borrowing peers inflict an intense pressure on women clients in the study community many borrowers maintain their regular payment schedules through a process of loan recycling that considerably increases the debt liability on the individual households increases tension and frustration among household members produces new forms of dominance over women and increases violence in society

can social cohesion be harnessed to repair market failures evidence from group lending in guatemala the success of group lending in developing countries has been attributed to the ability of the institution to mitigate asymmetric information problems in credit markets previous research has offered a number of explanations for this phenomenon social ties between borrowing group members internal group pressure to repay loans and peer monitoring this research presents empirical tests on borrowing group data from guatemala which indicate that peer monitoring significantly effects borrowing group performance through stimulating intra group insurance group pressure is found to have a small effect in deterring moral hazard while the effect of social ties among members is statistically insignificant

residential demand for electricity under inverted block rates evidence from a controlled experiment block rate structures are used extensively in public utility pricing including residential electricity estimating price elasticities in this context is complicated by the resulting nonlinearity of the consumer s budget constraint this article estimates the demand for electricity under inverted block rates using data from a residential rate experiment the study provides an opportunity to obtain short run price elasticities in an experimental setting and to compare alternative estimators developed for nonlinear budget constraints elasticities of demand with respect to individual components of the block rate are developed using a modification of the structural maximum likelihood estimator

peer monitoring and credit markets a major problem for institutional lenders is ensuring that borrowers exercise prudence in the use of the funds so that the likelihood of repayment is enhanced one partial solution is peer monitoring having neighbors who are in a good position to monitor the borrower be required to pay a penalty if the borrower goes bankrupt peer monitoring is largely responsible for the successful financial performance of the grameen bank of bangladesh and of similar group lending programs elsewhere but peer monitoring has a cost it transfers risk from the bank which is in a better position to bear risk to the cosigner in a simple model of peer monitoring in a competitive credit market this article demonstrates that the transfer of risk leads to an improvement in borrowers welfare

repayment performance in group based credit programs in bangladesh an empirical analysis abstract this paper analyzes the repayment rates of 128 credit groups belonging to three group based credit programs in bangladesh the association for social advancement asa the bangladesh rural advancement committee brac and the rangpur dinajpur rural service rdrs using tobit analysis specific tests are performed on the following hypothesized determinants group size size of loans degree of loan rationing enterprise mix within groups demographic characteristics social ties and status and occurrence of idiosyncratic shocks the paper concludes that if basic principles of prudential banking are adhered to repayment rates can be good even in poor and remote communities the important thing for financial institutions is to tailor services such that it becomes worthwhile for the poor to establish a profitable long term association in addition more freedom to members in the process of group formation is recommended

group lending local information and peer selection this paper analyzes how group lending programs use joint liability to utilize local information that borrowers have about each other s projects through self selection of group members in the group formation stage these schemes are shown to lead to positive assortative matching in group formation faced with the same contract this makes the effective cost of borrowing lower to safer borrowers because they have safer partners conditional on success their expected dues to the lender are lower than that of riskier borrowers the resulting improvement in the pool of borrowers is shown to increase repayment rates and welfare q 1999 elsevier science b v all rights reserved

liability structure in small scale finance evidence from a natural experiment microfinance the provision of small individual and business loans has witnessed dramatic growth reaching over 150 million borrowers worldwide much of its success has been attributed to overcoming the challenges of information asymmetries in uncollateralized lending yet very little is known about the optimal contract structure of such loans there is substantial variation across lenders even within a particular setting this paper exploits a plausibly exogenous change in the liability structure offered by a microfinance program in india which shifted from individual to group liability lending the analysis finds compelling evidence that contract structure matters for the same borrower required monthly loan installments are 6 percent less likely to be missed under the group liability setting relative to individual liability in addition compulsory savings deposits are 19 percent less likely to be missed under group liability contracts

work disincentives of workers compensation permanent partial disability benefits evidence for canada this paper examines the impact of workers compensation benefits and expected labour market earnings on the post injury employment status of permanently injured workers permanent partial disability benefits in ontario at the time the data were collected were not related to post injury labour market earnings and can therefore be characterized as having a pure income effect on post injury employment behaviour the estimation results indicate an elasticity of post injury employment to workers compensation permanent disability ben efits of 0 15 evaluated for the mean worker the elasticity of post injury employment to expected post injury labour market earnings is about 0 94 per cent les desincitations au travail des prestations d indemnisation permanente des travailleurs pour incapacite partielle ce memoire examine l impact des prestations d indemnisation des travailleurs et des gains anticipes sur le marche du travail sur le statut d emploi des travailleurs incapacites de maniere permanente les prestations permanentes pour compenser une incapacite partielle n etaient pas reliees aux gains apres l accident en ontario au moment out les donnees ont ete recueillies on peut donc parler d un effet de revenu pur sur le comportement de travail apres l accident les resultats montrent que pour le travailleur moyen l elasticite de l emploi apres l accident par rapport a la prestation d incapacite est de 0 15 d autre part l elasticite de 1 emploi apres l accident par rapport aux gains anticipes sur le marche du travail apres l accident est a peu pres 0 94 pour cent

screening by the company you keep joint liability lending and the peer selection effect we look at an economic environment where borrowers have some information about the nature of each other s projects that lenders do not we show that joint liability lending contracts similar to those used by credit cooperatives and group lending schemes will induce endogenous peer selection in the formation of groups in a way that the instrument of joint liability can be used as a screening device to exploit this local information this can improve welfare and repayment rates if standard screening instruments such as collateral are unavailable

the benefits and costs of microfinance evidence from bangladesh abstract using the latest developments from the evaluation literature namely the technique of matching this paper shows a positive but lower than previously thought effect of microfinance on expenditure per capita supply of labour and level of school enrolment for boys and girls for instance participants spend 3 per cent more on average than non participants in control villages this paper also takes into account repayment delays to calculate the cost of credit provision it shows how a better investigation at the individual level of the benefits brought and the cost borne could help microfinance institutions to better select their customers jel classification c14 d10 g21 i38 o12 o16