Essays in microfinance : theory and evidence on sequential lending
The dissertation explores mechanisms by which a lender can use timings of loans to engender peer monitoring and increase lending efficiency, when lending to a group of jointly liable impoverished individuals. We show that by disbursing the loans in a sequence (restricting the number of loans per period), the lender can finance a greater range of projects and allow poorer individuals to join the groups. Sequential lending entails lending to one borrower per period with the proviso that the second borrower's loan is contingent on first borrower's repayment. Simultaneous lending lets the borrowers make the decisions on their respective tasks simultaneously, requiring the lender to incentivise tasks collectively. Sequential lending separates the decisions on the task temporally and tasks are incentivised individually. Conversely, the lender's capital is less productive in sequential as compared to simultaneous lending. We show that if monitoring technology is sufficiently efficient, a greater range of projects are feasible under sequential lending. In a case-study of a Microfinance Institution in India, we found evidence of sequential lending. The lender restricted the number of group members that could borrow simultaneously, giving non-borrowers incentives to monitor the borrowers. We found significant income heterogeneity within the groups with wealthier members obtaining a higher proportion of loans. We build a stylised model based on the case-study. We show that the lender can engender negative assortative matching (wealthy pairing-up with poorer individuals) by restricting credit to the group. By requiring that the borrower and the non-borrower acquire a stake in the borrower's project, the lender determines the wealth-threshold for joining the group. Restricting credit creates intra-group competition for loans. The wealthy pair-up with poorer individuals to curtail the competition for loans within the group. By forbidding the group members to borrow simultaneously, the lender is able to lower the wealth-threshold for joining the group.