Jakiela, PamelaGiné, XavierKarlan, DeanMorduch, Jonathan2012-06-182012-06-182006-07https://hdl.handle.net/10986/8368Microfinance has been heralded as an effective way to address imperfections in credit markets. But from a theoretical perspective, the success of microfinance contracts has puzzling elements. In particular, the group-based mechanisms often employed are vulnerable to free-riding and collusion, although they can also reduce moral hazard and improve selection. The authors created an experimental economics laboratory in a large urban market in Lima, Peru and over seven months conducted 11 different games that allow them to unpack microfinance mechanisms in a systematic way. They find that risk-taking broadly conforms to predicted patterns, but that behavior is safer than optimal. The results help to explain why pioneering microfinance institutions have been moving away from group-based contracts.CC BY 3.0 IGOADVERSE SELECTIONAGENTSBANKSCOMMERCIAL BANKSCREDIT MARKETSDEFAULT RISKECONOMICSEXTERNALITIESGAMESINDUCEMENTINSURANCEINVENTORYINVESTMENT CHOICESJOINT LIABILITYMICROFINANCEMORAL HAZARDPERFECT INFORMATIONPREPARATIONPROGRAMSRATESRECIPROCITYRISK AVERSIONRISK OF DEFAULTRISK TAKINGSAVINGSSAVINGS ACCOUNTSSIMULATIONSSOCIAL COSTSSOCIAL NETWORKSOCIAL NETWORKSTABLESWorld Bank10.1596/1813-9450-3959