Liability Structure in Small-Scale Finance: Evidence from a Natural Experiment

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Liability Structure in Small-Scale Finance: Evidence from a Natural Experiment

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Title: Liability Structure in Small-Scale Finance: Evidence from a Natural Experiment
Author: Carpena, Fenella; Cole, Shawn; Shapiro, Jeremy; Zia, Bilal

Note: Order does not necessarily reflect citation order of authors.

Citation: Carpena, Fenella, Shawn Cole, Jeremy Shapiro, and Bilal Zia. "Liability Structure in Small-Scale Finance: Evidence from a Natural Experiment." Harvard Business School Working Paper, No. 13-018, August 2012
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Abstract: Microfinance, the provision of small individual and business loans, has witnessed dramatic growth, reaching over 150 million borrowers worldwide. Much of its success has been attributed to overcoming the challenges of information asymmetries in uncollateralized lending. Yet, very little is known about the optimal contract structure of such loans―there is substantial variation across lenders, even within a particular setting. This paper exploits a plausibly exogenous change in the liability structure offered by a microfinance program in India, which shifted from individual to group liability lending. We find evidence that the lending model matters: for the same borrower, required monthly loan installments are 11 percent less likely to be missed under the group liability setting, relative to individual liability. In addition, compulsory savings deposits are 20 percent less likely to be missed under group liability contracts.
Terms of Use: This article is made available under the terms and conditions applicable to Open Access Policy Articles, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#OAP
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:9502858

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