Effects of Peer Monitoring and Contract Choice on Repayment Rates Under Group Liability Lending

Abstract

This article addresses the issue of peer monitoring and choice of contracts on the repayment behaviour of the subjects. The authors conducted a laboratory experiment using student subjects from the University of Sydney, Australia by employing profit sharing (PS) and conventional interest based (IB) microfinance contracts. In the four treatments, subjects were given the choice to monitor their group partner and also had the choice between selecting one of these two contracts under the group lending scenario. The results indicated statistically significant effect of monitoring on the repayment rates. Interestingly, a significantly high percentage of subjects opted for the PS contracts against the IB contracts. These higher take up rates of PS contracts, however, were not associated with an increase in repayment rates. Not surprisingly though, as the experiment was conducted in Australia, the level of religiosity remained rather an insignificant factor affecting the repayment behaviour of the subjects.