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Microfinance games, Volume 1
 
Author:Gine, Xavier; Jakiela, Pamela; Karlan, Dean; Morduch, Jonathan; Country:Peru;
Date Stored:2006/07/27Document Date:2006/07/01
Document Type:Policy Research Working PaperSubTopics:Civic Participation and Corporate Governance; Banks & Banking Reform; Insurance & Risk Mitigation; Financial Intermediation; Social Accountability
Language:EnglishRegion:Latin America & Caribbean
Report Number:WPS3959Collection Title:Policy, Research working paper ; no. WPS 3959
Volume No:1  

Summary: Microfinance has been heralded as an effective way to address imperfections in credit markets. But from a theoretical perspective, the success of microfinance contracts has puzzling elements. In particular, the group-based mechanisms often employed are vulnerable to free-riding and collusion, although they can also reduce moral hazard and improve selection. The authors created an experimental economics laboratory in a large urban market in Lima, Peru and over seven months conducted 11 different games that allow them to unpack microfinance mechanisms in a systematic way. They find that risk-taking broadly conforms to predicted patterns, but that behavior is safer than optimal. The results help to explain why pioneering microfinance institutions have been moving away from group-based contracts.

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