Using a Referrals Program to Test for Asymmetric Information and Borrowers’ Ability to Influence Repayment Behavior of Fellow Borrowers in South Africa

In recent years, the shift in microcredit from group-liability to individual-liability has accelerated. The most commonly cited driving force behind this trend is borrowers’ aversion to both group tension and free-riding by fellow group members. Usually, the shift to individual-liability microcredit results in the loss of group-liability's two biggest advantages: peer screening and peer pressure. In this study, however, we test a “client referrals” promotional campaign that seeks to recapture these efficiencies.

Our partner lender is interested in increasing the number of first-time applicants via a client referrals promotional campaign. In addition, this lender would like to attract good applicants and encourage good repayment behavior. By randomizing the rules of the promotion, we will be able to detect whether clients have asymmetric information on the borrowing “type” of fellow borrowers, and if clients are able to influence the repayment behavior of fellow clients. Based on this information, we will be able to design an optimal referrals program going forward.

Our partner lender operates in South Africa’s “cash loan” industry, offering high-interest, short-term credit with fixed repayment schedules to a “working poor” population. As part of the promotional campaign, first-time borrowers receive two Refer-A-Friend Vouchers with their loan. These vouchers follow one of four sets of rules that dictate how the client becomes eligible for a Referral Bonus. The randomized variation in the rules will allow us to answer our research questions.

Dean Karlan, Jonathan Zinman

Cosignatory Requirement as a Barrier for Women Accessing Credit in Peru

Microfinance institutions have long targeted women as recipients due to the belief that women more reliably pay back their loans and the increased access to funds serves to improve women's decision-making power in the household. However, some institutions implement a co-signature requirement in order for women to take out a microfinance loan. This may be acting as a barrier for women to access credit.

IPA has partnered with Microfinanzas PRISMA, an MFI in Peru, to identify the implications of the cosignatory requirement. The study is set up in four agencies in the Peruvian Highlands: Huancayo, Huaraz, Juliaca and Tarma. Through a geographic randomization of districts, the study divides all new communal banks in these areas into two groups: 1. The control group, in which the cosignatory requirement remains the same, and 2. The treatment group, in which the cosignatory requirement is removed. The study will use a baseline and follow-up survey to analyze whether the removal of the signature is allowing more people to join the banks and if the default rate is increasing. Other questions from the surveys will be within the realm of household dynamics and bargaining.

Dean Karlan, Melissa Tartari

Demand for Hospital Insurance in the Philippines

We partner with Green Bank to assess the demand for hospital insurance among microfinance clients.  Green Bank offered the insurance to clients at randomly assigned premiums.  By observing the take-up rates at different prices, we can measure the price sensitivity.   We also collect an extensive data on demographics and risk characteristics of the individuals in the sample, which allows for an examination of adverse selection in the insurance market (risky individuals are less price sensitive than risk-adverse individuals).

The impact of information asymmetries on insurance markets is important in theory but ambiguous in practice.  Generations of studies have failed to produce a consensus on the presence, absence, or magnitude of adverse selection and moral hazard in most markets.   While an increasing number of microfinance institutions offer insurance products to their clients as an add-on, there are few empirical studies on the impact of expanding access to health or hospitalization insurance in developing country contexts.

The sample of our study includes 2,036 existing clients under the Green Bank's individual-lending program (TREES) in 10 branches of Northern Mindanao and Caraga regions. 

Dean Karlan, Jonathan Zinman

Impact of Rural Credit in Peru

Few studies have rigorously quantified the impacts of microcredit loans or determined the sensitivity of borrowers to interest rate pricing. In cooperation with the Peruvian microfinance institution ARARIWA, IPA is investigating the impact of microloans on the whole as well as determining the demand curve for microcredit.

For the study, areas in Cuzco are divided into one of three groups: a control group with no access to credit during the 24 months of the study, a treatment group that will receive credit offers at a lower interest rate, and treatment group that will receive credit offers at a higher interest rate. Data is being collected to analyze the take-up of microcredit loans, changes in socioeconomic levels, and borrower sensitivity of interest rates.

Dean Karlan

Financial Literacy and Privatized Social Security in Mexico

The study is designed as a survey with an embedded experiment and took advantage of Mexico's privatized social security system, which requires workers to choose their retirement investment funds (AFOREs) from an approved list.  This research project will collect detailed survey data and implement a series of field experiments in order to further understand the factors that determine workers' investment choices. The survey will collect information on financial planning, financial literacy, and investor perceptions of the privatized social security market.

The survey will also contain two field experiments. The first will examine if survey participants are more likely to switch funds when provided with transparent information on the fees each AFORE charges. The second will test if financial literacy can be taught by providing simplified information on the importance of compounding interest, coupled with information about fees charged by the AFORE.  The survey results will allow for estimates of the impact of each piece of information on fund choice and sensitivity to fees. This information can be combined with information on market-level responses by AFOREs, with regard to their fees and total number of investors.

If most people (regardless of income) choose funds to minimize fees, AFOREs will compete on price.  But if more people choose based on brand names or convenience, then funds will be less concerned with price and more concerned with brand promotion.  Previous research has suggested that  more-educated consumers choose funds to minimize fees, while less-educated consumers choose funds based on brand name or convenience.  Because lower income individuals are likely to have less education, market outcomes may lead to lower net returns for low-income households.

Since social security is intended to be a safety net that provides income in old age to all citizens, differences in individuals' investment behavior (and firm response) across demographic groups is critically important for understanding the impacts of privatization on income distribution.

Justine Hastings
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