Referrals: Peer Screening and Enforcement in a Consumer Credit Field Experiment

Gharad Bryan, Dean Karlan, Jonathan Zinman
2015 American Economic Journal: Microeconomics  
Empirical evidence on peer intermediation lags behind both theory and practice in which lenders use peers to mitigate adverse selection and moral hazard. Using a referral incentive under individual liability, we develop a two-stage field experiment that permits separate identification of peer screening and enforcement. Our key contribution is to allow for borrower heterogeneity in both ex ante repayment type and ex post susceptibility to social pressure. Our method allows identification of
more » ... ntification of selection on repayment likelihood, selection on susceptibility to social pressure, and loan enforcement. Implementing our method in South Africa we find no evidence of screening but large enforcement effects. (JEL D14, D82, G21, O12, O16) E conomic theory assigns credit market failure a central role in explaining poverty and underdevelopment. Borrowing constraints reduce efficiency, increase inequality and can lead to poverty traps (Banerjee and Newman 1993; Galor and Zeira 1993). Credit rationing also appears to be empirically important. Making use of experimental or quasi-experimental supply shocks, several recent papers estimate a large unmet demand for additional credit from consumers, microenterprises, and small and medium enterprises. 1 These studies, coupled with a literature that often finds high returns to capital (e.g., de Mel, McKenzie, and Woodruff 2008), lend credence to policy and programmatic efforts to relax borrowing constraints. But how should one go about relaxing borrowing constraints? Information asymmetries, including ex ante selection and ex post incentive and enforcement problems, are often invoked as the root causes of borrowing constraints in theory (Stiglitz 1 For consumers see, e.g., Karlan and Zinman (2010) , for microenterprises see, e.g., Banerjee (2013) and the references therein, and for SMEs see, e.g., Banerjee and Duflo (2014).
doi:10.1257/mic.20130234 fatcat:bffdtd64abggjid55yy6tio2y4