Using Repayment Data to Test Across Models of Joint Liability Lending

By Christian Ahlin, Robert M. Townsend. 2007

365 citations recorded by the source corpus.

Spurred by its successful delivery of credit to poor borrowers in diverse areas of the developing world, joint liability lending has caught the imagination of development theorists and practitioners. Various theories have arisen to explain why joint liability group-based lending can be an improvement over traditional individual-based lending. Here we exploit the idea that if a model were true, the repayment rate would vary in a systematic way with various covariates. We thus use observed repayment rates to test across four representative and oft-cited models of joint liability lending. The theoretical part of this paper develops the models' implications for repayment and derives new ones, signing the derivative of a project choice, monitoring, default, or selection equation. For example, we find that several models imply that higher correlation of output can raise the observed repayment rate, and in some the ability to act cooperatively leads to lower repayment rates. More generally, the models agree on some dimensions and conflict on others. The empirical part uses survey data from 262 Thai joint liability groups of the Bank for Agriculture and Agricultural Cooperatives (BAAC) and from 2880 households of the same villages. Nonparametric, univariate tests and multivariate logits are used to evaluate the predictions of the models. A hybrid, partially linear procedure is used to understand any differences in the results between the two types of tests. We find that the Besley and Coate model of limited enforcement is strongly supported in the more rural, poorer region of Thailand covered by the data. In the more prosperous region, closer to Bangkok, support is found for the Stiglitz model of moral hazard and the Ghatak model of adverse selection.

Subfields: Economics and Econometrics, Soil Science

View Paper: https://www.semanticscholar.org/paper/fea8a3b21f08fe9a69b5ec3a052bcd7694faea2a

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Citations in the corpus

Social Connections and Group Banking (2007, neutral): “Ahlin and Townsend (2007) and Wydick (1999) find that groups that report threats of social sanctions for failure to repay have higher repayment; however, why some groups decide to have such policies is not understood, and potentially endogenous (or potentially creating omitted variable problems for…”
The effect of social capital on group loan repayment: evidence from field experiments* (2007, neutral): “This result appears consistent with what Ahlin and Townsend (2007) (this Feature) find on the importance of self-selection and screening among their borrowers in central Thailand.”
Contract Structure, Risk Sharing and Investment Choice (2011, background): “Two notable exceptions are Ahlin and Townsends (2007) work in Thailand and Wydicks (1999) in Guatemala, both of which nd that social ties can lower repayment rates.”
THE EMPIRICS OF MICROFINANCE: WHAT DO WE KNOW? (2007, neutral): “Using a very rich dataset containing detailed information on 262 groups of the Bank for Agricultural Copperatives (BAAC) in Thailand, Ahlin and Townsend (2007) empirically test the predictions of the four different models.”
Group versus Individual Liability: Long Term Evidence from Philippine Microcredit Lending Groups (2009, neutral): “evidence that the depth of family relations within a group is correlated with default (Ahlin and Townsend 2007).”
Does Microfinance Reduce Poverty in Bangladesh? New Evidence from Household Panel Data (2012, background): “Therefore, there was still scope for further extending the coverage of microcredit programmes in 2005 to an approximate 18.52 million borrowers who were poor and economically active but not covered by MFI programmes (Ahmed, 2007).”
Mobile Money and Financial Inclusion in Sub-Saharan Africa: the Moderating Role of Social Networks (2018, neutral): “(2011), Aker and Mbiti (2010) who observed that as large numbers of poor people in developing countries migrate from rural to urban areas to earn livelihood, they have the great need to send money back to their families on regular basis.”
Microfinance: Creating Opportunities for the Poor? (2010, background): “A series of papers theoretically explores optimum contract design for group-based loans (Bond & Rai, 2008) and empirically tests the implications of different theories of joint liability contracting (Ahlin & Townsend, 2007).”
Financial Performance and Outreach: A Global Analysis of Leading Microbanks (2006, background): “Armendáriz de Aghion and Morduch (2005) provide a critical guide to the economics literature on microfinance, and Ahlin and Townsend (2007) test leading models with Thai data. 2 We take this goal on face value, although we recognise the case for subsidised microfinance when social benefits sufficien”
Access to Finance (2010, neutral): “Ahlin and Townsend (2007), with data from Thailand, find social ties (measured by sharing among non-relatives, cooperation, clustering of relatives, and village-run savings and loan institutions) actually reduce repayment rates, though stronger social sanctions improve them.”
Group lending or individual lending? Evidence from a randomised field experiment in Mongolia (2011, background): “Those that start an enterprise reduce their non-durable consumption so they can pay for the (cid:28)xed cost of the start-up 3 Ahlin and Townsend (2007) empirically test various repayment determinants in a joint-liability context.”
What drives microfinance institution's financial sustainability (2010, background): “Ahlin and Townsend (2007) and Casar et al (2007) note that social sanctions are another means of preventing repayment default stemming from ill will by some members of the group, which contributes to the financial sustainability of MFIs.”
The Benefits and Costs of Microfinance: Evidence from Bangladesh (2008, background): “This analysis is very close in spirit to Ahlin and Townsend (2007), Cassar et al.”