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Abstract

We quantify the importance of peer effects in group lending by estimating a static game of incomplete information. In our model, group members make their repayment decisions simultaneously based on their household and loan characteristics as well as their expectations on other members’ repayment decisions. Exploiting a rich data set of a microfinance program in India, our estimation results suggest that the likelihood of a member making a full repayment would be 15 percent higher on average if all the other follow members make full repayment compared to the case where none of the other members repay in full. We also find that large inconsistencies exist in the estimated effects of other variables in models that do not incorporate peer effects and control for unobserved heterogeneity.

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