Microfinance games

Four economists have been playing games in Peru. The goal: to figure out why some group-based microfinance schemes have been successful when one could assume that they would encourage free-riding and risky behavior. So they gathered a group of small-scale entrepreneurs in a local market and conducted a series of simulations with them around fictitious loans and the choice between safe and risky projects. They found that:

…the tendency toward free-riding also emerges in groupliability structures, and that patterns of risk-taking broadly conform to predicted patterns. We also find that inefficiencies are allayed by allowing clients to form their own groups voluntarily. The endogenous formation of groups allows customers to sort into relatively homogenous pairings that limit the degree to which groups induce free-riding and tax safe behavior. Given endogenous group formation, microfinance contracts can function effectively to reduce moral hazard.

Via the always fun Interest Bearing Notes.