| Abstract: |
Most problems with formal sector credit lending to the poor in developing
countries can be attributed to the lack of information and inadequate
collateral. One common feature of successful credit mechanisms is
group-lending, where the loan is advanced to an individual if he/she is a part
of a group and members of the borrowing group can monitor each other. Since
group members have better information about each other compared to lenders,
peer monitoring is often less expensive than lender monitoring. Theoretically
this leads to greater monitoring and greater rates of loan repayments. This
paper reports the results from a laboratory experiment of group lending in the
presence of moral hazard and (costly) peer monitoring. We compare peer
monitoring treatments when credit is provided to members of the group
sequentially and simultaneously, and individual lending with lender
monitoring. The results depend on the relative cost of monitoring by the peer
vis-à-vis the lender. In the more typical case where the cost of peer
monitoring is lower than the cost of lender monitoring, our results suggest
that peer monitoring results in higher loan frequencies, higher monitoring and
higher repayment rates compared to lender monitoring. In the absence of
monitoring cost differences, performance is mostly similar across group and
individual lending schemes, although loan frequencies and monitoring rates are
sometimes modestly greater with group lending. Within group lending, although
the dynamic incentives provided by sequential leading generate the greatest
equilibrium surplus, simultaneous group leading provides equivalent empirical
performance. |