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

rural transformation inequality and the origins of microfinance abstract what determines the development of rural financial markets starting from a simple theoretical framework we derive the factors shaping the market entry of rural microfinance institutions across time and space we provide empirical evidence for these determinants using the expansion of credit cooperatives in the 236 eastern counties of prussia between 1852 and 1913 this setting is attractive as it provides a free market benchmark scenario without public ownership subsidization or direct regulatory intervention furthermore we exploit features of our historical set up to identify causal effects the results show that declining agricultural staple prices as a feature of structural transformation leads to the emergence of credit cooperatives similarly declining bank lending rates contribute to their rise low asset sizes and land inequality inhibit the regional spread of cooperatives while ethnic heterogeneity has ambiguous effects we also offer empirical evidence suggesting that credit cooperatives accelerated rural transformation by diversifying farm outputs

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

are consumption taxes really better than income taxes abstract we use political equilibrium theory and the neoclassical growth model to compare consumption and income tax systems if government outlays are used for redistribution through transfers then steady state equilibria in societies that use income taxes are not necessarily worse in welfare terms and may even be better income taxes are attractive precisely because they are more distortionary since this implies low equilibrium transfer levels we also find that switching tax systems typically does not benefit the median voter moreover a change from income to consumption taxes may make everybody worse off

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

capital taxation and accumulation in a life cycle growth model almost all of the serious economic work on savings decisions within the past decade has relied on some variant of the life cycle hypothesis in which savings arise out of individual choices of an optimum lifetime consumption path this paper reexamines the incidence and welfare consequences of capital income taxes within a realistic life cycle model the results suggest that the elimination of capital income taxation would have very substantial economic effects for example a complete shift to consumption taxation might raise steady state output by as much as 18 percent and consumption by 16 percent the long run welfare gain from such a shift would for plausible parameter values exceed 150 billion annually stated somewhat differently shifting to consumption taxation would raise the lifetime utility of the representative consumer by the equivalent of about six years income in the new steady state these estimates dwarf estimates of the static welfare cost of taxation and significantly exceed even extreme previous estimates of the dynamic loss this study departs from earlier analyses of the effects of taxes on capital income in several respects probably the most important difference between this treatment and most preceding ones lies in the assumptions about the interest elasticity of saving it is shown below that the common two period formulation of saving decisions yields quite misleading results a more realistic model of life cycle savings demonstrates that for a wide variety of plausible parameter values savings are very interest elastic this implies that shifting away from capital income taxation would significantly increase capital formation making possible long run increases in consumption many studies of the welfare effects of capital income taxation have ignored the general equilibrium effects of increased capital formation in an economy with life cycle savings there is no presumption that the undistorted growth path corresponds to any sort of social optimum as peter diamond has shown life cycle savings can lead to a steady state capital intensity either greater or less than the golden rule level more generally it is clear that there is no reason to believe that a life cycle economy will maximize any particular intertemporal social welfare function a fundamental tenet of welfare evaluation is that preexisting distortions must be considered in evaluating the consequences of tax changes the results presented in this paper take explicit account of the nonoptimal character of the no tax steady state this explains in large part why such a sizeable welfare effect of capital taxes is found in an economy far from the golden rule level of capital intensity there are substantial gains in steady state consumption achievable through increased capital formation section i of the paper examines the aggregate savings function in a continuous time life cycle framework the second section clarifies the differences between wage and consumption taxes an aggregate production function is added to complete the model in the third section the effects of changes in capital taxes on both steady state incidence and welfare are considered within a general equilibrium framework the final section of the paper discusses some implications of the results and suggests areas which appear to warrant further study assistant professor of economics massachusetts institute of technology and research analyst national bureau of economic research i am grateful to alan auerbach martin feldstein laurence kotlikoff to the participants in the nber workshop on business taxation and to the harvard public finance seminar for useful discussions james poterba and james buchal performed the numerical calculations

the microfinance promise in the past decade microfinance programs have demonstrated that it is possible to lend to low income households while maintaining high repayment rates even without requiring collateral the programs promise a revolution in approaches to alleviating poverty and spreading financial services and millions of poor households are served globally a growing body of economic theory demonstrates how new contractual forms offer a key to microfinance success particularly the use of group lending contracts with joint liability for the most part however high repayment rates have not translated into profits and studies of impacts on poverty yield a mixed picture in describing emerging tensions the paper highlights the diversity of innovative mechanisms beyond group lending contracts the measurement of financial sustainability the estimation of economic and social impacts the costs and benefits of subsidization and the potential to reduce poverty through savings programs rather than just credit the promise of microfinance has pushed far ahead of the evidence and an agenda is put forward for addressing critical empirical gaps and sharpening the terms of policy discussion

group lending with endogenous group size this paper focuses on the size of the borrower group in group lending we show that when social ties in a community enhance borrowers incentives to exert eort a pro t maximizing nancier chooses a group of limited size borrowers that would be fundable under moral hazard but have insu cient social ties do not receive funding the result arises because there is a trade obetween raising pro ts through increased group size and providing incentives for borrowers with less social ties the result may explain why many micro lending institutions and rural credit cooperatives lend to groups of small size

pressure groups and redistribution abstract the simple pressure group model of political redistribution can predict more with less restrictive assumptions instead of ready made pressure groups composed of individuals who vote their pocketbooks we posit heterogeneous agents each of whom decides which group to join and how much effort to expend on political activity our model then examines social affinity conditions that foster pressure group formation political sympathies based on social affinity imply testable effects of growth rate and income distribution on progressive transfers effects that prove substantial in pooled time series cross section regressions for 13 oecd countries 1960 1981

the effects on agriculture in the united states of an oil import fee this paper focuses on the effect that a crude oil import fee would have on the various producing sectors consuming sectors and household categories in the united states where the interrelationships between these entities is explicitly considered special attention is given to the agricultural sectors of the economy thus in the context of a general equilibrium model the effect of a 5 00 per barrel import fee on the producing sectors in general and the three agricultural sectors plus forestry in particular on the consuming sectors on households and on the government is calculated over the period 1984 90 with such an import fee relative to the absence of a crude oil import fee the model results suggest that there will be a reduction in output by all producing sectors except the crude oil industry by about 13 924 billion there will be a fall in the consumption of goods and services by about 318 million and there will be a decline in aggregate social welfare measured as utility by about 208

the role of subsidies in microfinance evidence from the grameen bank the grameen bank of bangladesh has been in the vanguard of the microfinance movement showing the potential to alleviate poverty by providing credit to poor house holds part of this success has been built on subsidies in 1996 for example total subsidies evaluated at the economic opportunity cost of capital amounted to about us 26 30 million the evidence helps to explain why institutions like grameen have not just sprung up on their own as private commercial ventures and it underscores the value of openly addressing the costs and benefits of subsidization the paper also describes recent difficulties in maintaining high repayment rates q 1999 elsevier science b v all rights reserved

the empirics of microfinance what do we know microfinance has received a lot of attention recently both from policy makers as well as in academic circles two of the main topics that have been hotly debated are explaining joint liability group lending and its implications for reducing information asymmetries and the trade off between the financial sustainability and outreach of microfinance programmes this feature contains three novel empirical contributions providing new insights with respect to why and how joint liability group lending works it also contains the first large scale systematic analysis of the trade off between financial performance and outreach of microfinance institutions

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

is grameen lending efficient repayment incentives and insurance in village economies many believe that a key innovation by the grameen bank is to encourage borrowers to help each other in hard times to analyse this we study a mechanism design problem where borrowers share information about each other but their limited side contracting ability prevents them from writing complete insurance contracts we derive a lending mechanism which efficiently induces mutual insurance it is necessary for borrowers to submit reports about each other to achieve efficiency such cross reporting increases the bargaining power of unsuccessful borrowers and is robust to collusion against the bank copyright 2004 wiley blackwell

can group incentives alleviate moral hazard the role of pro social preferences abstract incentivizing unobservable effort in risky environments such as in insurance credit and labor markets is vital as moral hazard may otherwise cause significant welfare losses including the outright failure of markets ensuring incentive compatibility through state contingent contracts between principal and agent however is undesirable for risk averse agents we provide a theoretical intuition on how pro social preferences between agents in a joint liability group contract can ensure incentive compatibility two independent large scale behavioral experiments framed in an insurance context support the hypotheses derived from our theory in particular effort decreases when making agents payoff less state dependent but this effect is mitigated with joint liability in a group scheme where agents are additionally motivated by pro social concerns activating strategic motives slightly increases effort further particularly in non anonymous groups with high network strength the results support existing evidence on joint liability groups and further suggest that even if peer pressure to ensure effort provision is absent such group policies can improve efficiency when agents are pro social

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

microfinance performance and social capital a cross country analysis in recent years the microfinance industry has received a substantial amount of cross border funding from both public and private sources this funding reflects the increasing interest in microfinance as part of a more general trend towards socially responsible investments in order to be able to secure sustained interest from these investors it is important that the microfinance industry can show evidence of its contribution to reducing poverty at the bottom of the pyramid for this it is crucial to understand under what conditions microfinance institutions mfis are able to reduce poverty this paper contributes to this discussion by investigating the relationship between the extent to which social capital formation is facilitated within different societies and the financial and social performance of mfis this focus on social capital formation is important because in many cases mfis use group loans with joint liability to incentivize asset poor borrowers to substitute the lack of physical collateral by their social capital hence the success of a large part of the loan relationship between mfis and their borrowers depends on the social capital those borrowers can bring into the contract we carry out a cross country analysis on a dataset containing 100 countries and identify different social dimensions as proxies for how easy social capital can be developed in different countries we hypothesize that microfinance is more successful both in terms of their financial and social aims in societies that are more conducive to the development of social capital our empirical results support our hypothesis

enhancing capabilities through credit access creditworthiness as a signal of trustworthiness under asymmetric information article i nfo creditworthiness and trustworthiness are almost synonyms because under asymmetric information the act of conferring a loan has the indirect effect of signaling the trustworthiness of the borrower we test the creditworthiness trustworthiness nexus in an investment game experiment on a sample of participants non participants in a microfinance program in argentina and find that trustors give significantly more to and believe they will receive more from microfinance borrowers the first and second order beliefs of trustees are also consistent with this picture our findings then show that mf participants appear more trustworthy and this may help microfinance to work a related consequence is that if and only if borrower s trustworthiness is not public information the mere loan provision acts as a reputation enhancing signal increasing the borrower s attractiveness as a business partner in such case we have a channel through which a private financial intermediary contributes to the provision of a public good like information thereby

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

saving more in groups field experimental evidence from chile abstract we test the impact of a peer group program on savings in a sample of microcredit clients we conduct two randomized trials among these 2687 microcredit clients the first finds that a savings group treatment which combines public goal setting monitoring in the group and non financial rewards increases savings in a new savings account significantly the number of deposits grows 3 7 fold and the average balance almost doubles in contrast a more classical measure a substantially increased interest rate has no effect for most participants and raises the savings balance only for the very top of the distribution a second experiment conducted a year later tests an alternative delivery mechanism and shows that effects of similar size can be achieved through feedback text messages without meetings rewards or peer pressure given that participants are borrowing at 90 apr we discuss how and when saving more could be harmful or beneficial

moral hazard and peer monitoring in a laboratory microfinance experiment abstract this paper reports the results from a laboratory microfinance experiment of group lending in the presence of moral hazard and costly peer monitoring we compare peer monitoring treatments in which credit is provided to members of the group to individual lending treatments with lender monitoring we find that if the cost of peer monitoring is lower than the cost of lender monitoring peer monitoring results in higher loan frequencies higher monitoring and higher repayment rates compared to lender monitoring in the absence of monitoring cost differences however lending monitoring and repayment behavior is mostly similar across group and individual lending schemes within group lending contrary to theoretical predictions simultaneous and sequential lending rules provide equivalent empirical performance

can micro credit bring development abstract we examine the long run effects of micro credit on development in an occupational choice model similar to banerjee and newman jpe 1993 micro credit is modeled as a pure improvement in the credit market that opens up self employment options to some agents who otherwise could only work for wages or subsist micro credit can either raise or lower long run gdp since it can lower use of both subsistence and full scale industrial technologies it typically lowers long run inequality and poverty by making subsistence payoffs less widespread thus an equity efficiency tradeoff may be involved in the promotion of micro credit however in a worst case scenario micro credit has purely negative long run effects the key to micro credit s long run effects is found to be the graduation rate defined as the rate at which the self employed build up enough wealth to start full scale firms we distinguish between two avenues for graduation winner graduation of those who earn above average returns in self employment and saver graduation due to gradual accumulation of average returns in self employment long run development is not attainable via micro credit if winner graduation is the sole avenue for graduation in contrast if the saving rate and self employment returns of the average micro borrower are jointly high enough then micro credit can bring an economy from stagnation to full development through saver graduation thus the lasting effects of micro credit may partially depend on simultaneous facilitation of micro saving eventual graduation of the average borrower rather than indefinite retention should be the goal of micro banks if micro credit is to be a stepping stone to broad based development rather than at best an anti poverty tool

bogus joint liability groups in microfinance abstract in a random sample of clients of cfpam the largest microlender in china 73 of all joint liability groups practice lei da hu that is one person uses all group members loans in a single project we call such borrower groups bogus groups the lei da hu practice violates a key premise of group lending that each borrower must use their loan in a separate project what we call standard group we extend the theory of group lending by analyzing the endogenous formation and coexistence of standard and bogus groups and characterize the efficient lending terms the chosen group form depends on the borrower productivities and probability of success bogus groups are formed by heterogeneous borrowers when the gains from larger expected output exceed the foregone default risk diversification accounting for bogus groups in their lending strategy can help mfis raise productive efficiency and borrower welfare

bank insured rosca for microfinance experimental evidence in poor egyptian villages abstract microfinance institutions mfis have continued to grow over the past few decades both in numbers of clients and portfolio sizes the growth of these mfis has enabled greater access to credit in many of the world s less developed nations however recent studies have shown that very many of the poor especially muslims remain unbanked confounding this problem in many muslim countries is the poor s propensity to reject microfinance when available on religious grounds in this paper we develop an alternative microfinance model which aims to establish credit unions for the poor in which the bank plays the role of a guarantor in the familiar rotating savings and credit association rosca we test the performance of this model against a stylized sequential grameen style microcredit provision in a laboratory experiment in the field conducted in poor egyptian villages our model of bank insured roscas is shown to solve coordination failure problems that may otherwise prevent the spontaneous development of informal roscas in practice empirically our bank insured rosca model generated significantly higher takeup and repayment rates than the grameen model this suggests that this model by overcoming the religious barriers to credit can be a useful alternative to grameen style microfinance

social networks and factor markets panel data evidence from ethiopia we investigate the role of an indigenous social network in ethiopia the iddir in facilitating factor market transactions among smallholder farmers we use detailed longitudinal household survey data and employ fixed effects estimation approaches to identify the effect of iddir membership on factor market transactions among farmers we find that joining an iddir network improves households access to land labour and credit transactions our findings also hint that iddir networks may crowd out borrowing from local moneylenders locally referred as arata abedari a relatively expensive credit source these results suggest that non market institutions can play crucial roles in facilitating market transactions

repayment performance in group lending evidence from jordan abstract using data from a survey of 160 urban borrowing groups of the microfund for women in jordan we investigate the effect of screening peer monitoring group pressure and social ties on borrowing groups repayment behavior as an indirect test of different theoretical models the dependent variable used captures the intensity of default measured by the total number of days of late repayment after each due date allowing us to use count data models with cluster standard errors as theory predicts our empirical analysis suggests that peer monitoring group pressure and social ties reduce delinquency the paper uncovers interesting evidence about the role of social ties and religion most notably in an area where religion contributes to attitudes and beliefs of individuals we find that religiosity improves repayment performance

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

kin groups and reciprocity a model of credit transactions in ghana this paper studies kinship band networks as capital market institutions membership in a community where individuals are dynastically linked has two effects on informal credit first the nonanonymity of the dynastic link allows to sanction the defaulters offspring and induce compliance even in short term interactions social enforcement second preferential agreements can arise in which kin members condition their behavior on the characteristics of a player s predecessor expecting others to do the same with their offspring reciprocity these effects are incorporated in an olg game with endogenous matching between lenders and borrowers and tested using household level data from ghana

the role of group size in group lending abstract this paper explores group size in joint liability lending primarily in the adverse selection framework with local borrower information a single standardized contract that imposes full joint liability subject to a limited liability cap is optimal further if gross returns to borrowing are moderately high this contract results in perfectly efficient lending if groups are large enough however raising group size accomplishes nothing if there is no local borrower information these results show that more is required for efficient lending than full within group insurance and highlight a complementarity between group size and social capital very similar results are shown in two different settings ex ante and ex post moral hazard though the type of social capital that complements group size varies across the settings taking a step toward modeling drawbacks of larger groups it is shown that if information deteriorates sufficiently with group size an intermediate group size does better than either extreme simulations suggest that most of the efficiency gains from larger groups are realized in group sizes below ten and that outreach and efficiency can increase dramatically when a moderate group size threshold is crossed

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

the role of social capital in financial development to identify the effect of social capital on financial development we exploit social capital differences within italy in high social capital areas households are more likely to use checks invest less in cash and more in stock have higher access to institutional credit and make less use of informal credit the effect of social capital is stronger where legal enforcement is weaker and among less educated people these results are not driven by omitted environmental variables since we show that the behavior of movers is still affected by the level of social capital of the province where they were born

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

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

do risky microfinance borrowers really invest in risky projects experimental evidence from bolivia abstractthis paper reports the results of an experiment testing a fundamental assumption in stiglitz and weiss 1981 model of credit rationing that defaulting borrowers are associated with investment in risky projects through an artefactual field experiment with 200 bolivian microfinance borrowers we observe that subjects from real world delinquent borrowing groups do not prefer risky projects to safer ones significantly more than subjects from repaying groups instead our results support more recent behavioural theories of credit market failure implications are that defaulting microfinance borrowers may be those who take too little investment risk rather than those who take too much

uninsured health shocks and agricultural productivity among rural households the mitigating role of micro credit this article investigates how health shocks affect farm productivity in the presence of microcredit it is expected that microcredit increases agricultural productivity by enhancing allocative and

how important are endogenous peer effects in group lending estimating a static game of incomplete information summary we quantify the importance of endogenous peer effects in group lending programs by estimating a static game of incomplete information endogenous peer effects describe how one s behavior is affected by the behavior of her peers using a rich dataset from a group lending program in india our empirical analysis presents a robust finding of large peer effects the preferred model suggests that the probability of a member making a full repayment would be 12 percentage points higher if all the fellow members were to make full repayment compared with a scenario in which none of the other members repay in full we find that peer effects would be overestimated without controlling for unobserved group heterogeneity and that inconsistencies exist in the estimated effects of other variables without modeling peer effects and unobserved heterogeneity copyright 2012 john wiley sons ltd

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

does political competition lessen ethnic discrimination evidence from sri lanka abstract the impact of political competition on ethnic discrimination remains largely unexplored to address this gap this paper explores the relationship between the level of political competition and the probability of receiving government transfers among ethnic minorities in sri lanka in the run up to the national elections of 2000 the paper shows that making politicians dependent on the votes of members of ethnic groups other their own can encourage moderation in discriminatory practices towards ethnic minorities specifically we find that political competition positively influenced the distribution of government food stamps among sri lankan tamils who otherwise are less likely to receive food stamps relative to the sinhalese majority the negative impact of political competition on discrimination is higher when minorities form part of swing constituencies than when they form part of the base support for political parties lessons learnt here suggest that having built in incentives in the design of the electoral process for intergroup bargaining and cooperation in countries with ethnically heterogeneous societies can be an effective restraint on ethnic discrimination this is consistent with other research that considers political institutions to be a key lever for making ethnically divided societies more inclusive

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

anatomy of the credit score abstract this paper addresses the question of what determines a poor credit score we compare estimated credit scores with measures of impulsivity time preference risk attitude and trustworthiness in an effort to determine the preferences that underlie credit behavior data is collected using an incentivized decision making lab experiment together with financial and psychological surveys credit scores are estimated using an online fico credit score estimator based on survey data supplied by the participants preferences are assessed using a survey measure of impulsivity with experimental measures of time and risk preferences as well as trustworthiness controlling for income differences we find that the credit score is correlated with measures of impulsivity time preference and trustworthiness

political jurisdictions in heterogeneous communities we investigate whether political jurisdictions form in response to the trade off between economies of scale and the costs of a heterogeneous population we consider heterogeneity in income race ethnicity and religion and we test the model using american school districts school attendance areas municipalities and special districts we find strong evidence of a trade off between economies of scale and racial heterogeneity we also find evidence of a trade off between economies of scale and income heterogeneity conversely we find little evidence that ethnic or religious heterogeneity shapes jurisdictions to clarify the direction of causality between heterogeneity and jurisdictions we exploit shocks to racial heterogeneity generated by the two world wars

access to finance an unfinished agenda recent data compilations show that many poor and non poor people in many developing countries face a high degree of financial exclusion and high barriers in access to finance theory and empirical evidence point to the critical role that improved access to finance has in promoting growth and reducing income inequality an extensive literature shows the channels through which finance promotes enterprise growth and improves aggregate resource allocation there is less evidence at the household level however and on the effectiveness of policies to overcome financial exclusion the article summarizes recent efforts to measure and analyze the impact of access to finance and discusses the unfinished research agenda

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

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

financial development financial liberalization and social capital abstractthe relationship between financial liberalization policies and financial development is controversial the impact of these policies differs greatly across countries in the literature the quality of formal institutions has been identified as an important source of this heterogeneity as countries with a weak institutional environment generally fail to benefit from financial liberalization using panel data covering 82 countries for the period 1973 2008 we find evidence that social capital may substitute for formal institutions as a prerequisite for effective financial liberalization policies in particular we find that during the post washington consensus period countries with a high prevailing level of social capital can ensure that financial liberalization positively influences financial development despite the poor quality of their formal institutions

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

social capital and loan repayment performance in northern vietnam this study analyses the effects of social capital on the loan repayment behavior of borrowers in vietnam 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 social capital has a significant and positive influence on the rescheduling of loans however we find no significant evidence for an effect of social capital on late payment of principal or interest

agricultural workers credit rationing and family networks in rural mexico abstractwe use mixed methods and first hand household data in mexico to investigate credit practices by households engaged in agricultural wage employment quantitative analysis shows evidence of rationing in the formal sector but also suggests the existence of mitigating mechanisms qualitative analysis provides additional insights first income patterns associated with agricultural wage generate income smoothing needs that are sometimes better met by the informal sector second family networks can perform key functions as gateways to the formal sector through specific informal arrangements that inject flexibility into formal rules and procedures

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 formation in risk sharing arrangements we study informal insurance within communities explicitly recognizing the possibility that subgroups of individuals may destabilize insurance arrangements among the larger group we therefore consider self enforcing risk sharing agreements that are robust not only to single person deviations but also to potential deviations by subgroups however such deviations must be credible in the sense that the subgroup must pass exactly the same test that we apply to the entire group it must itself employ some self enforcing risk sharing agreement we observe that the stability of subgroups is inimical to the stability of the group as a whole two surprising consequences of this analysis are that stable groups have uniformly bounded size a result in sharp contrast to the individual deviation problem and that the degree of risk sharing in a community is generally non monotonic in the level of uncertainty or need for insurance in the community

how effective is a big push to the small evidence from a quasi experiment summary this paper investigates whether a big push to the extreme poor in terms of a one off large grant enables them to participate in the microfinance program the analysis uses data from a quasi experiment on brac s ultra poor program in bangladesh the results for the baseline and repeat survey data for the treatment and comparison groups show that such a big push does make a significant impact on graduation to the microfinance program the results are robust to correction for self selection bias social capital and awareness also play important role in their decision on ngo membership and borrowing

peer pressure experimental evidence from restroom behavior we provide experimental evidence on the effect of peer pressure on individual behavior specifically we study the effect of being exposed to an observer in a public restroom on handwashing and urinal flushing behavior our estimates show that being exposed to an observer increases the probability of handwashing by 13 percentage points and the probability of urinal flushing by 15 percentage points given that handwashing and urinal flushing have social benefits that exceed individual benefits our findings provide support for peer pressure as an additional way of addressing the social suboptimality arising from externalities jel c91 c93

trust us to repay social trust long term interest rates and sovereign credit ratings this paper asks whether the sensitivity of market long term interest rates and credit ratings is associated with cross country differences in informal institutions measured by social trust we note a number of theoretical mechanisms that could imply that similar objective problems are more likely to be effectively dealt with in higher trust societies a set of panel estimates across middle and high income countries reveal that interest rates and ratings are substantially more sensitive to inflation and growth problems in low trust countries this finding sheds light on the differential market reactions to economic problems in seemingly comparable countries jel codes g12 a13

vested interests in a positive theory of stagnation and growth we study a positive theory of stagnation and growth aimed at understanding the large variations in growth outcomes across actual economies the theory points to the fundamental role played by vested interests in determining policies which are key to the growth process some agents seek to prevent the adoption of new technologies we develop a model of technology adoption and show how technological innovation may sow the seeds of its own destruction in particular we find that the equilibrium is characterized by a long cycle of stagnation and growth over this cycle incumbents are phased out of the economy will new innovation occur in formalizing our theory we make a methodological contribution by characterizing dynamic voting equilibria when voters must forecast the effects of different current policies on future prices and policy outcomes

factor shares and savings in endogenous growth in models of steady investment driven growth an individual s propensity to save depends on how much of his income is drawn from accumulated factors of production capital rather than from nonaccumulated factors when agents are heterogeneous in this respect growth oriented policies have distributional consequences and in the absence of lump sum redistribution their implementation faces political constraints if the median voter is capital poor relative to the economy s representative agent political interactions tend to slow down growth when policy acts on capital s income share and tend to accelerate it when investment subsidies are the policy instrument of choice copyright 1993 by american economic association

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

microlending in emerging economies building a new line of inquiry from the ground up the world s poor may be the last great frontier in international business international microlenders are increasingly tapping into this emerging opportunity by extending small business loans to millions of borrowers however to date there is very limited understanding of this domain from an international business perspective using qualitative case studies developed in guatemala and the dominican republic we probe the causes and consequences of high performance and business failure for microloan recipients the analysis of these cases led to the development of six testable propositions focused on the behavior of borrowers whose loans populate the portfolios of international microlenders our research aims to lay a foundation in international business for future research on microlending

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

social capital formation and credit access evidence from sri lanka summary while previous studies evaluate the impact of social capital on development outcomes there are very few empirical studies on determinants of social capital formation we use unique long panel data from sri lanka to examine the mechanism of social capital formation in an imperfect credit market we show that households facing credit constraints reduce investments in social capital furthermore temporal declines in investment persistently reduce general trust trust in villagers and trust in business partners while previous studies argue that social capital improves access to informal credit we show the reverse causality combining these findings suggests a potential poverty trap

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

sequential lending with dynamic joint liability in micro finance this paper develops a theory of sequential lending in groups in micro finance that centers on the notion of dynamic incentives in particular the simple idea that default incentives should be relatively uniformly distributed across time in a framework that allows project returns to accrue over time as well as strategic default we show that sequential lending can help resolve problems arising out of coordinated default thus improving project efficiency vis a vis individual lending inter alia we also provide a justification for the use of frequent repayment schemes as well as demonstrate that depending on how it is manifested social capital has implications for project efficiency and borrower default we next examine the optimal choices for the mfi and derive conditions for the optimality of the group lending arrangement our framework also provides for some plausible hypotheses as to why there has been a recent transition from group to individual lending