Group vs Individual Liability Flashcards
Authors of the paper?
Giné and Karlan (2010).
Why use a RCT?
Unobserved characteristics that drive individual selection into one contract or the other makes it difficult to establish a causal relationship between the contract terms when simply comparing performance of one product over the other.
The experiment:
RCT in the PHILIPPINES.
First trial removed group liability from pre-existing groups.
Second trial randomly assigned villages to either group of individual liability loans.
First trial allows us to separate selection from moral hazard.
Pitfalls of group lending?
Clients dislike the tension caused by group liability.
‘Bad’ clients can free-ride off ‘good’ clients.
Group lending is more costly for low risk clients.
Heterogeneity in loan sizes can cause tension within the group.
Borrowers who would pay under individual liability may not do so under group liability.
Why were group members required to make mandatory savings deposits?
Group savings were held as collateral to cover late/defaulted payments within each group.
Groups that were converted to individual liability had their savings dissolved and shifted to individual savings accounts.
Affects of conversion to individual liability:
No adverse effect on repayment for the baseline clients.
Similar results for new clients joining the groups.
Still some sort of social pressure to repay the loans even though the group liability aspect has gone.
Loan sizes?
Smaller for new clients under individual liability.
Probability of defaulting 30 days after maturity?
3% points less likely for repeat loans.
Likelihood to stop borrowing?
Baseline clients slightly more likely to stop borrowing after converting to individual.
New clients less likely to stop borrowing.
Likelihood of existing centres being dissolved after converting to individual liability?
13.7% points less likely.
Allocated time of loan officers?
In pre-existing areas, there is no statistically significant difference in the way credit officers allocated their time.
In new areas, credit officers spent more time on repayment activities in individual liability centres.
Why would ‘bad’ risk borrowers join an individual liability centre?
Current borrowers lack the incentive to screen and monitor other members.
Why would ‘good’ risk borrowers join an individual liability centre?
Repayment only depends on their performance, unlike group liability centres where they may have to frequently help other members repay.
