Identification strategy : a field experiment on dynamic incentives in rural credit markets, Vol. 1 of 1

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Identification strategy : a field experiment on dynamic incentives in rural credit markets

Author:	Gine, Xavier; Goldberg, Jessica; Yang, Dean;	Collection Title:	Policy Research working paper ; no. WPS 5438
Country:	World;	Date Stored:	2010/10/04
Document Date:	2010/10/01	Document Type:	Policy Research Working Paper
Language:	English	Region:	The World Region
Report Number:	WPS5438	SubTopics:	Bankruptcy and Resolution of Financial Distress; Access to Finance; Economic Theory & Research; Debt Markets; Microfinance
Volume No:	1 of 1

Summary: How do borrowers respond to improvements in a lender's ability to punish defaulters? This paper reports the results of a randomized field experiment in rural Malawi that examines the impact of fingerprinting borrowers in a context where a unique identification system is absent. Fingerprinting allows the lender to more effectively use dynamic repayment incentives: withholding future loans from past defaulters while rewarding good borrowers with better loan terms. Consistent with a simple model of borrower heterogeneity and information asymmetries, fingerprinting led to substantially higher repayment rates for borrowers with the highest ex ante default risk, but had no effect for the rest of the borrowers. The change in repayment rates is driven by reductions in adverse selection (smaller loan sizes) and lower moral hazard (for example, less diversion of loan-financed fertilizer from its intended use on the cash crop).


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