Moral Hazard, Peer Monitoring, and Microcredit: Field Experimental Evidence from Paraguay

This paper presents findings from a field experiment that explored the impact of peer monitoring on moral hazard in a group of women about to enter a group loan program in Paraguay. The study gathered administrative data on members’ repayment behavior in the six-month period following the experiment. It measured individual propensities to monitor under incentives similar to group liability. It also collected a variety of other potential correlates of borrowing behavior and repayment.

The study aims to test the assumption of many group lending models that peer monitoring can solve the moral hazard problem in lending to people who have no appreciable collateral. Findings include:

• There is a significant link between peer monitoring and group loan performance;
• Borrowers in groups with above median monitoring are 36% less likely to have a problem repaying their portion of the loan;
• Individuals in groups with monitors who are nosy are approximately 10% less likely to have problems repaying their loans;
• Risk preferences, social preferences, and cognitive skills affect repayment.