Abstract
Given the substantial amount of resources currently invested in microcredit programmes, it is more important than ever to accurately assess the extent to which peer monitoring actually reduces moral hazard among borrowers faced with group liability. We conduct a field experiment with women about to enter a group loan programme in Paraguay and then gather administrative data on their repayment behaviour in the 6-month period after the experiment. In addition to the experiment, which is designed to measure individual propensities to monitor one's peers, we collect a variety of other potential correlates of behaviour and repayment. Controlling for other factors, we find a very strong causal relationship between the average monitoring propensity of a person's loan group and repayment. Our most conservative estimate suggests that borrowers in highly monitored groups are 36% less likely to have problems repaying their portions of the loan. In addition, confirming previous results, we also find some evidence that risk preferences, social preferences and cognitive skills affect repayment.
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