Identification Strategy: A Field Experiment on Dynamic Incentives in Rural Credit Markets

This paper reports results of a randomized field experiment in rural Malawi that examines the impact of fingerprinting borrowers.

In the experiment, smallholder farmer groups applied for agricultural input loans to grow paprika. The study allocated them to either a control group or a treatment group. Each member of the treatment group had to give a fingerprint as part of the loan application. Fingerprinting customers allowed lenders to construct credit histories and use them to withhold new loans from past defaulters.

The study develops a model that incorporates adverse selection and moral hazard. It shows that dynamic incentives can reduce asymmetric information problems and raise repayment. Study findings indicate that consistent with the model’s predictions, fingerprinting:

• Led to substantially higher repayment rates for the sub-group of farmers with the highest ex-ante default risk;
• Had no impact on repayment for farmers with low ex ante default risk;
• Leads farmers to choose smaller loan sizes, consistent with a reduction in adverse selection;
• Led farmers with high default risk to divert fewer inputs away from the contracted crop.