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Microfinance games
Author:Gine, Xavier; Jakiela, Pamela; Karlan, Dean; Morduch, Jonathan; Collection Title:Policy, Research working paper ; no. WPS 3959
Country:Peru; Date Stored:2006/07/27
Document Date:2006/07/01Document Type:Policy Research Working Paper
SubTopics:Civic Participation and Corporate Governance; Banks & Banking Reform; Insurance & Risk Mitigation; Financial Intermediation; Social AccountabilityLanguage:English
Region:Latin America & CaribbeanReport Number:WPS3959
Volume No:1 of 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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