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American Economic Journal: Applied Economics: Vol. 2 No. 3 (July 2010)

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Microfinance Games

Article Citation

Giné, Xavier, Pamela Jakiela, Dean Karlan, and Jonathan Morduch. 2010. "Microfinance Games." American Economic Journal: Applied Economics, 2(3): 60-95.

DOI: 10.1257/app.2.3.60

Abstract

Microfinance banks use group-based lending contracts to strengthen borrowers' incentives for diligence, but the contracts are vulnerable to free-riding and collusion. We systematically unpack microfinance mechanisms through ten experimental games played in an experimental economics laboratory in urban Peru. Risk-taking broadly conforms to theoretical predictions, with dynamic incentives strongly reducing risk-taking even without group-based mechanisms. Group lending increases risk-taking, especially for risk-averse borrowers, but this is moderated when borrowers form their own groups. Group contracts benefit borrowers by creating implicit insurance against investment losses, but the costs are borne by other borrowers, especially the most risk averse. (JEL D82, G21, G31, O16)

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Authors

Giné, Xavier (World Bank)
Jakiela, Pamela (Washington U in St Louis)
Karlan, Dean (Yale U)
Morduch, Jonathan (NYU)

JEL Classifications

D82: Asymmetric and Private Information
G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G31: Capital Budgeting; Fixed Investment and Inventory Studies
O16: Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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