Identification Strategy : A Field Experiment on Dynamic Incentives in Rural Credit Markets
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 uniq...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20101004091720 http://hdl.handle.net/10986/3921 |
| 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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